- Total volume of investment transactions fell 46% QoQ and 59% YoY. However, activity slightly picked up in Q3 as Q2 numbers were skewed by a big-ticket deal (HKD11.3bn).
- Investors should pay attention to small-sized hotels that offer attractive pricing, as well as defensive assets like neighbourhood malls and data centres.
- Overall and CBD office rents are forecasted to fall by 17% YOY and 20% YOY, respectively in 2020, before an expectation to stabilise from 2021 onwards.
- Kowloon East is the only sub-market to record a positive net take-up in Q3 of 114,900 sq. ft. as overall Grade A office space sees five consecutive quarters of negative net take-up.
- IPO pipeline creates positive outlook supported by rising interest in secondary listings.
Hong Kong, 21 October 2020 – Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services and investment management firm, has released its latest Q3 Quarterly Update which looks at the recent movement and recommendations for stakeholders in the commercial office leasing and investment sectors. Hong Kong’s real estate stakeholders are poised as caution is embedded into the local and global decision-making processes which is extending the wait and see attitude; albeit for some, creating an opportunistic environment.
Rosanna Tang, Head of Research, Hong Kong and Southern China, explained: “Across the real estate market, we’re seeing an increase in enquiries and some opportunities for stakeholders to leverage current conditions, despite some waiting for signs of economic recovery. Moving into 2021, we expect to see investment appetite to remain solid with those that have raised funds and for private equity firms to become active.”
As the market continues to evolve, stakeholders must remain in close contact. “We recommend that occupiers talk with landlords to use the declining market to secure more favourable lease terms. Landlords will likely face more competition in backfilling surrendered space, which creates an opportunity for occupiers to negotiate amid a slow economy and high vacancy rates,” added Tang.
High levels of capital yet to be deployed due to market uncertainty
The total volume of investment transactions fell by 46% Quarter-on-Quarter (QoQ) in Q3 to HK$10.1bn (US$1.3bn) despite market sentiment showing signs of recovery. Overall activity in 2020 continues to be muted as uncertainty around geo-politics and COVID-19 fuels the year-long pricing gap between sellers and buyers’ valuations.
Antonio Wu, Deputy Managing Director of Capital Markets and Investment Services, said: “Funds with a strong capital base are actively seeking investment opportunities with a focus on distressed assets that have the potential to offer good returns when the market recovers. This is fuelled by some recently completed transactions for assets in core areas that show a significant discount from peak prices.”
Although 2021 seems to be the focus for many investors, there are still deals to be done this year. “Central-based Grade A office space continues to provide some of the strongest returns, but for those looking to diversify, we recommend paying attention to small-sized hotels with attractive pricing, as well as assets offering a defensive return like neighborhood malls and data centres,” added Wu.
Low leasing demand creates occupier opportunities
Hong Kong’s Grade A office demand continued to be subdued in Q3 as surrender stock contributed to an overall negative net take-up of -539,214 sq. ft., QoQ. However, Kowloon East has proven to be attractive to occupiers as it’s the only sub-market that has recorded a positive net take-up in Q3 of 114,900 sq. ft. To stimulate interest, landlords have been more flexible by offering attractive lease terms to encourage the retention of existing occupiers.
Fiona Ngan, Head of Office Services, stated: “We forecast that the overall and CBD office rents will drop by 17% and 20% Year-on-Year (YoY) respectively, in 2020. This decline has created an occupier-centric market with surrendered stock becoming more readily available to renew, or even upgrade with performing industries like private banking, wealth management and insurance firms looking to capitalise.
“This quarter witnessed a number of MNC’s downsize which has pushed up the vacancy rates to 8.9%; the highest level since October 2004. However, we believe the upcoming IPO pipeline, secondary listings, gradual opening up of China’s finance sector, and the cross-border initiatives between Hong Kong and mainland China, should attract PRC firms with a need to establish a footprint in Hong Kong,” added Ngan.
As uncertainty underpins the decision-making process, occupiers are considering interim leasing solutions. "The need to be flexible is also important and has led to an increase in enquiries and commitment in the co-working sector,” said Chris Hui, Executive Director Office Services. “Occupiers are still showing a need to be cost-conscious, especially around operational costs. To have a short to medium-term real estate solution as the market recovers enables businesses to wait and see before committing to a new long-term lease,” added Hui.