Hong Kong, 24 July 2019 – Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services, released its Quarterly Reports for Q3 2019 to evaluate Hong Kong’s property market. The quarterly reports explore factors affecting the Office, Industrial, Retail and Residential sectors as well as hidden opportunities.
“During Q3 2019, Hong Kong’s property market was weighed down by new and continued economic and political issues, including the US-China trade war and citywide demonstrations. Against this backdrop, we are encouraged by the Policy Address’s focus on short-to-medium-term initiatives targeting the acute housing problem, while offering solutions for the long-term land supply. However, we also feel that there are limited measures to provide support to the weakening economic pillars and it is short of vision on the commercial and industrial sectors. We have moderate expectations for the rest of 2019 as well as 2020,” said Rosanna Tang, Head of Research, Hong Kong and Southern China, Colliers International.
Residential: Home buyers expected to be reinvigorated by Policy Address measures
The economic slowdown and social unrest were reflected in a weaker residential market performance in Q3 2019. Transaction volume declined by 40.3% QOQ, while residential prices were down by 1.5% in the two months of July and August. Over the next five years, annual completions should reach 16,500 units. Despite being about 3% higher than the average completions from 2014 to 2018, shortage of supply should remain.
The new Policy Address, which announced a relaxation on the loan-to-value ratio for first-time buyers on residential flats worth not more than HK$10 million, can reinvigorate long-waiting home buyers. Colliers expects that developers will rush to launch their first-hand sales in Q4. Therefore, Colliers’ 2019 forecast for mass residential market will remain positive at 6% YOY growth. Furthermore, the unsolved housing supply issue should continue to support price growth after 2020 once economic clouds scatter.
“On the back of a slower economic outlook, home buyers in general are becoming more cautious, although primary sales of some residential launches remained active. The new Policy Address will help the market respond positively due to cheaper financing costs, despite the fact that the current bottleneck remains in terms of affordability for most young families. We expect that the sales of smaller residential units (i.e. less than 500 sq ft) will outperform the luxury market over the remainder of 2019,” said Hannah Jeong, Head of Valuation and Advisory at Colliers International Hong Kong.
Rental growth for the luxury market slowed given the generally weaker market sentiment. However, rental growth should stay flat in 2020 as vacancy remains tight. Landlords have become more negotiable with more realistic asking rents in general. Tenants may find discounted rental in particular developments which have more vacancies.
Office: Stronger bargaining power amid uncertainty
Cautious business sentiment has been reflected in a further decline in leasing activities and office rents. Leasing momentum has been slow with the overall net take-up staying negative, as Central and Admiralty recorded the fifth consecutive quarter of negative net take-up. As demand continues to soften, Colliers has revised the 2020 CBD rental forecast to −13.1% YOY.
While some landlords have already softened their asking rents, average CBD rents declined notably by 3.7% QOQ. Grade A office rents declined with a greater magnitude in Q3 2019. This led to Colliers’ revised forecast for overall Grade A office rent to decline −8.1% YOY in 2020. Rents in Island East remained firm and recognised the only positive rental growth among major submarkets by increasing 0.5% QOQ.
Most major submarkets recorded increasing vacancy as demand was muted and firms’ expansion plans are deferred. To secure occupancy, Colliers recommends landlords proactively engage with tenants with greater flexibility and incentives such as capital expenditures and rent-free or license periods.
“The investment momentum will likely remain slow for the rest of 2019, while price level could be further pressed on the back of the weaker rental outlook for Grade A offices. However, the prospect of low interest rate environment should be favorable for long-term investments while some funds are still very cash-rich. Individual investors or end-users should gain stronger bargaining power amid the uncertain market,” said Fiona Ngan, Head of Office Services, Colliers International Hong Kong.
Retail: New trends emerged to appeal to local customers
Despite the cautious market sentiment, international brands still see Hong Kong as one of the most important retail locations in which to have a presence. While tourist arrivals dropped 22.6% YOY in Q3, which led retail sales to fall by 17.2% YOY, Colliers observes new trends in retail as the industry embraces retail+art, leisure+lifestyle and retail-tainment vibes in the market to appeal to the local base as local consumption becomes increasingly important.
In Q3 2019, all core districts witnessed rental correction as overall high-street rents were pushed down by 7.1% QOQ. Looking ahead, Colliers forecasts rents to drop further in core retail districts of Hong Kong in Q4 2019 and through to next year. In the short term, external and local market uncertainties will likely continue to lead retailers and brands to take longer to finalise their expansion or relocation plans. However, in the long run, rent should recover with moderate speed once the current societal situation improves.
“Demand from international brands remains positive, with new brands announcing their entrance to the Hong Kong market in Q3 2019. We recommend retailers (in particular, brands who have a sustainable and strong local customer base) to take advantage of this time to expand in key shopping malls and/or re-enter first-tier core high streets,” said Cynthia Ng, Director of Retail Services, Colliers International Hong Kong.
Industrial: Warehouse sector showing resilience
External trade continued to be impacted by the escalating trade tensions between the US and China, with the value of total trade down by 8.1% YOY. However, a lack of new supply and very limited availability continues to prevent warehouse rents from falling. In addition, the shift of manufacturing from China to Southeast Asian countries, with Hong Kong remaining a transshipment point, as well as warehousing demand driven by e-commerce offset part of the impact of trade tensions. Against this backdrop, overall warehouse rents in Hong Kong were largely flat, rising only 0.1% QOQ.
Amid economic slowdown and weak market sentiment, investors largely focus on ownership unification for industrial units at buildings with redevelopment potential. The Revitalization Scheme 2.0 should continue to reduce the stock of industrial space for non-industrial use. Colliers recommends investors to take advantage of the Revitalization Scheme 2.0 policy by redeveloping industrial buildings for commercial uses, especially in non-core areas with limited upcoming new commercial supply such as Tuen Mun and Yuen Long.
“Looking ahead, whilst the US Fed has further cut down its interest rate in September, this will likely provide support to the prospect of a low interest rate environment in the short-to-medium term, which should be favorable for the investment market. Furthermore, the relaunch of the Revitalization 2.0 scheme should continue to drive up the capital value of industrial properties,” said Joseph Lam, Business Line Leader of Industrial Services, Colliers International Hong Kong.
Find out more about how each key sector has performed during Q3 2019 and explore their hidden opportunities by downloading our Colliers Quarterly Reports for Q3 2019 - Office, Retail, Residential, and Industrial.