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Property Market Outlook - No gloom and doom as the property market rebalances

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While 2019 is presenting itself as a different year, we maintain confidence in Hong Kong’s resilience against adversities and the number of opportunities arising from the property market. Even though the market sentiment turned negative by the end of 2018, we are seeing institutional investors maintain a certain level of assurance in the city’s market; albeit, based on our Annual Hong Kong Investor Survey Report 2018, with a wait-and-see approach until H2 2019.

Overall, the property market has been impacted by the US-China trade war, more so than interest rates and liquidity. However, with abundant liquidity and the prospect of less interest rate increases in 2019, we expect investors to return to the market once property prices have stabilized. We also expect a moderate recovery in the residential market in H2 2019, if the market reaches bottom before the mid-year, and we believe the industrial property sector could have the largest upside potential with the incoming round of industrial revitalisation.

IN THE OFFICE MARKET

While Central will still be the preferred location by the financial sector and MNCs, we would suggest they consider the CBD fringe areas like Sheung Wan, Wan Chai and Causeway Bay; where, if they’re considering relocating, occupiers might have a better combination of business amenities and affordable rents – which are likely to see positive growth. Still, the scaling back by some PRC companies and the addition of surrendered space during the current financial market decline will likely result in an increase of office supply in Central. We expect Central/Admiralty rents to drop by 3.8% in 2019, which would come as a healthy correction following more than 40% growth since early 2015.

We do expect office prices to drop by 5% in 2019, and investment yields to stabilise with rising capital costs. However, because of the lack of supply for quality stock, especially in the CBD, the current market downturn could offer good investment opportunities for potential buyers, especially end users looking to occupy their own buildings – as good quality stocks are always in short supply.

IN THE RESIDENTIAL MARKET

For 2019, we do not expect a residential market collapse, as it has not been over-leveraged as in 1997-1998. Still, investors should wait until mid-2019, when the impact of rising interest rates and trade disputes become more apparent. There is a chance that residential prices could stabilise by mid-year, followed by a moderate recovery in H2, with a fall of 3.8% for the whole of 2019.

The leasing market should stay relatively firm, as rental growth has been less volatile than price growth amidst a steady demand from tenants. This year we’re likely to see a rise in popularity with Kowloon and the New Territories following the expansion of the MTR network, an increased office supply in Kowloon East, and new school campuses opening in the Kowloon East and Sai Kung districts.

IN THE RETAIL MARKET

This year retailers will continue to look for first-tier high street locations, leveraging the adjusted rents in the current market landscape, while searching for opportunities for cautious expansion. Shop spaces with high street-front exposure should be the most sought after, but retailers are likely to compromise on shop size, given that shops below 3,000 sq ft have become the most popular due to their operational efficiency and the influence of online shopping. Despite current trends, prime street retail rents shoul continue to slowly increase by 1.7% in 2019, except for Central, which will remain under pressure as shop spaces are larger than what retailers currently prefer.

Neighbourhood shopping centres have also been on the rise, as they have become an investment focus for local and institutional investors. In 2019, neighbourhood shopping centres attached to new residential developments, where rents are marginally increasing YOY, can offer attractive value-added opportunities as new destinations.

IN THE INDUSTRIAL MARKET

The industrial market is likely to be in the spotlight this year, as continuous conversion and redevelopment of industrial buildings for office, retail, hotel and residential should sustain further rent and capital value increases this year. Already, forced relocations and a lack of new supply have pushed up rents and capital values by 121% and 230%, respectively, since 2010. This is further supported by our Annual Investor Survey 2018, which shows that many investors see industrial properties offering the best upside potential in 2019. Given the imbalance in demand and supply, we expect industrial rents and prices in 2019 to increase by 5.4% and 8.4% respectively.