6 December 2012

After a challenging year, Colliers International today predicted a promising year for Hong Kong’s property market in 2013. Sectors such as Grade A office, retail and industrial are expected to see positive buoyancy with retail taking the lead. One sector however, is forecasted to see weakening being the residential sector. 

Colliers International: 2013 Forecast for Hong Kong’s Property Sectors

Property Sector

Rental Change

Capital Value Change

Grade A Office

+5%

+9%

Luxury Residential

-5%

-10%

Retail

+7%*

+11%#

Industrial

+4%

+6%

(end 2012 vs. end 2013 year-on-year (YoY) change)

* Ground-floor shops in traditional districts; # Based on the price index of the overall retail market

Richard Kirke, Managing Director of Colliers International Hong Kong, says the luxury residential market is likely to come under substantial pressure in the new year, largely driven by the government’s cooling measures. 

“The consumer appetite for property investments is still riding high; hence with the latest curbs by the government in the residential market, investors are faced with the need to park their money in other markets such as office, retail and industrial properties. A short while after the curbs were announced, we have already started seeing these shifts in the investor buying patterns,” he said. 

These shifts will form the fundamental support for the expected growth in Grade A office, retail and industrial, he points out.
 

Property Investment Market
In 2012, Hong Kong’s property investment market experienced its version of a bull-run with investment transactions worth over HK$30 million each grew by 16% YoY to over 900 cases in volume and up by 8% YoY to HK$105,518 million in total transaction value from January to November 2012.

Retail property investments, with 554 transactions valued over HK$47.8 billion in total, constituted 45% of total investment transaction value in the first eleven months of 2012. It remains the major driver of the overall Hong Kong property investment – similar to the previous year. During the same period, it was followed by office en-bloc investment sales (with 24 cases and total transaction value of over HK$21.2 billion), making up 20% of the whole pie and replacing office strata-title sales as the second major driving force on the local property investments this year.

Antonio Wu, Executive Director of Investment Services, Asia said that while investment appetite remains strong in 2013, the number of en-bloc investment sales is likely to reduce due to the lack of stock for sale in the marketplace. “Undoubtedly office, retail and industrial properties in the local market will continue to attract investment focus in 2013 while office properties in Kowloon East will see strong buying interests by investment funds. Developers on the other hand, would possibly continue to offload their non-core assets thus creating buying opportunities for property investors in 2013,” said Wu.

Grade A Office Market
The Grade A office market in Hong Kong experienced contradicting indications in rents and prices in 2012, with the average rent dropping by 4% while the average price up by 3% during period from January to October 2012.

Wendy Lau, Executive Director of Office Services said that the average Grade A office rent in Central/Admiralty fell most notably in the first half of 2012, but has witnessed stabilising signs since mid 2012.   Lau believes that in the other key business hubs on Hong Kong Island such as Wan Chai/Causeway Bay, Island East and Sheung Wan, lease renewal is expected to dominate in 2013 due to the low vacancy rate in the areas. Her advice to tenants: “It is best to renew sooner rather than later in view of the potential upward pressure on rents amid limited leasing stock in the market.”

Over in Kowloon East, the rental gap with individual sub-markets on Hong Kong Island, such as Island East is seen to be narrowing due to the surge in rents experienced by Kowloon East since the government announced the CBD2 project. In recent months, Kowloon East is no longer seen to be the top option when it comes to relocation options for cost saving reasons. 

Instead, a new trend is surfacing in the district. Fiona Ngan, General Manager of Offices Services, Kowloon shared that, “As more owners of industrial and industrial-office (I-O) buildings opt to demolish or revitalise their properties for other uses such as hotel or office, the tenants in these premises would be forced to move out. This creates a new wave of domestic demand from the district itself which fuels leasing demand in Kowloon East.”

In 2013, Colliers projects resilient growth in Grade A office rents and prices. Despite tenants’ sustained cautious attitude on their operation cost, limited supply and an increase in leases due to expire in late 2013 are expected to fuel the average Grade A office rent to rise by 5% over the next twelve months. 

On the sales front, there are stronger investment interests in office properties after the extension of Special Stamp Duty and implementation of Buyers’ Stamp Duty in the residential market. The average Grade A office price is projected to increase by 9% with further compression on the yield. The main drivers of demand are anticipated to come from local private equities, overseas investors and real estate funds.

Residential Market
In 2012, Hong Kong’s residential sales market started with a volume rally in the first quarter, which weakened soon afterwards. 

“Despite a short-term recovery in the third quarter due to capital inflow into Hong Kong’s market, further tightening of mortgage lending policy in mid September, followed by the implementation of Buyer’s Stamp Duty and extension of Special Stamp Duty in October, have hurt the residential buying sentiment quite badly, particularly in the luxury residential market,” said Ricky Poon, Executive Director of Residential Sales.

The average luxury residential price increased by 4% between January and October 2012. With the government’s cooling measures, luxury residential prices will likely see downward adjustment pressure and expected to soften to the end-2011 level in average by the end of 2012.

With the government’s intention to curb speculation in the housing market and the implementation of Buyer’s Stamp Duty, end users are expected to dominate the market. Short-term price consolidation is anticipated in 4Q 2012 and 1Q 2013 while end users are expected to return to the market after the Lunar New Year when lenders become more active in offering mortgage loans. 

Over the next twelve months, Poon projects the average luxury residential rent and price to edge down by 5% and 10% respectively.

Retail Market
Amongst different property sectors in Hong Kong, retail property registered the most outstanding performance with 11% growth in average rents of high streets and 28% rise in overall retail property prices between January and October 2012.

Although Hong Kong’s overall retail sales value has reached record-breaking level in 2012, the retail sales value of jewellery, watches, clocks and other valuable gifts saw the first single-month dip in August 2012 since July 2009. This could be attributed to the subdued global economic environment as well as the slowing China economy, which caused mainland Chinese visitors to step on the brakes of their hyperactive spending sprees on luxury items.  

Although there are weakening signs on sales of luxury goods, shoppers are expected to continue their spree by shifting to mid-priced items. “Without any significant negative factors and supported by sustained interests to enter Hong Kong’s market by overseas retailers as well as rising inflation, the average retail property rent and price are projected to see continued growth, rising by 7% and 11% respectively in 2013,” predicted Simon Lo, Executive Director of Research & Advisory, Asia.

Industrial Market
Besides the retail property sector, industrial property sector also registered growth in both rents and prices in 2012. The average industrial rent and price increased by 4% and 17%, respectively, between January and October 2012. 

“The mild industrial rental growth in 2012 was supported by occupiers’ expansion plans, albeit at a slow pace, with logistic warehousing as the key growth sector. Meanwhile, the government’s initiatives to revitalise industrial properties buoyed the buying sentiment in the sector, which explained the double-digit growth in prices this year,” said Lo.

Looking ahead, the local industrial sector will likely be sprinkled with positive factors such as outsourcing of logistics functions by small and medium enterprises (SMEs) and a faster pace of industrial revitalisation. “In 2013, we expect the average industrial rent and price to edge up mildly by 4% and 6% respectively,” concluded Lo.

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