• 2018 – Expect another year of record highs for the residential and Grade A office markets

    12 December 2017

    (11 December 2017, Hong Kong) Capital values in the residential sector are expected to increase a further 10% in 2018 but with the potential to increase as much as 20%, according to JLL’s Year-end Property Market Review and Forecast published today. The government should review existing property policy measures to cool down the red hot residential market.


    Highlights of the report:

    • Rents in Central to increase in a range of 0-5% in 2018, after rising 5.2% through the first 11-months of 2017 and moving 1.5% higher than the previous market peak set in 2008.
    • Co-working operators became more active in leasing markets, securing 307,900 sq ft in 2017, compared to 149,200 sq ft in 2016.
    • The rental gap between Central and other business districts is expected to further widen, encouraging more tenant decentralisation.
    • High street rents continued to correct, albeit at a moderating pace, down 10.5% in 2017.
    • Rents in both prime shopping malls and along the high streets to bottom out in 2018 though the recovery will be mild, up in the range of 0-5%.
    • As part of their effort to improve sales, more retailers are now offering goods and services to accommodate the shrinking size of flats in Hong Kong with some convenience stores providing laundry services.
    • Improvements in global trade, a growing e-commerce market and the completion of the Hong Kong-Zhuhai-Macau Bridge to lift demand for prime warehouses and provide a platform for rents to return to growth after retreating 3.0% in 2017.
    • Capital values in the residential sector to rise by about 10% in 2018 but potentially as much as 20% under the right market conditions. The luxury segment will outperform the rest of the market.
    • We suggest that the government urgently review its current policy measures for the residential market to kickstart the secondary sales market. Potential solutions would be to extend the stamp duty rebate grace period, allow the DSD to be paid in phases for upgraders or allow higher LTV ratios on financing for home-upgraders.
    • Limited stock of Grade A office buildings for sale and sustainable rental markets will support office capital values to rise a further of 10% in 2018.


    Office Market

    Leasing activity in the Grade A office market continued to be mainly driven by cost-saving relocations with PRC companies and co-working operators the only notable tenant groups actively expanding in the market. A widening rental gap between Central and the other major submarkets—up to 64% higher in some cases—contributed to more tenants seeking to decentralise. Most notably, the pivot by the legal sector to decentralise continued with Baker McKenzie agreeing to lease 100,000 sq ft office at One Taikoo Place in Quarry Bay in November.

    PRC demand in Central remained robust and accounted for 48% of all new lettings in 2017. Co-working operators ramped up their expansion plans in Hong Kong with numerous active negotiations and have now leased about 600,000 sq ft in the commercial office market since 2011, including 307,900 sq ft in 2017 after leasing 149,200 in 2016. It is estimated that the size of co-working operators footprint in the city is now at about 1 million sq ft; taking into account both office and industrial buildings.

    Vacancy remained tight across the market for much of the year though the completion of new supply pushed vacancy rates higher in Tsimshatsui and Hong Kong East in 2H17. As at the end of November, the overall vacancy rate stood at just 4.8%. Kowloon East was the only submarket with double digit vacancy (10.9%) though mostly concentrated in recently completed buildings.

    Central’s vacancy rate remained low at 1.9% against sustained demand from PRC and financial services firms. The strong demand also boosted the rental market by 5.2% to HKD118.1 per sq ft and pushed rents 1.5% higher than the previous market peak level set in 2008.


    Alex Barnes, head of HK Markets at JLL, said: “With sustained PRC demand and a tight vacancy environment, we expect rents in Central to grow in a range of 0-5% in 2018. There will be 2 million sq ft of new commercial Grade A office supply completed in the market next year but this new supply is unlikely to have a significant impact on the Central office market given the lukewarm response of PRC companies to consider decentralised locations. Outside of Central, however, this new supply is likely to weigh on rentals. As a result, we expect rents in most other submarkets to remain largely flat while those in Kowloon East to decline in the range of 5-10% owing to the elevated levels of vacancy. The widening rental gap between Central and other business districts, however, should encourage yet more decentralisation.”


    Hong Kong Prime Office Indicator – % Change

    Submarket Rents*


    2018 Rental Forecast
    Central p5.2% p0-5%
    Wanchai/Causeway Bay p3.2% tu
    Hong Kong East p2.6% tu
    Tsimshatsui p1.5% tu
    Kowloon East q2.1% q5-10%
    Overall p3.5% p0-5%



    Retail Market

    Mainland visitor arrivals rebounded and grew 3.1% y-o-y in the first ten months of 2017 after contracting over the last two years. The recovery in mainland visitor arrivals boosted Hong Kong’s total visitor arrivals by 2.7% y-o-y over the same period, compared with a 4.5% decline in 2016.

    The return of mainland visitors helped lift retail sales with sales of watches and jewellery rebounding by 4.8% y-o-y in the first ten months, against a 17.2% fall recorded a year ago.

    Despite some modest improvements, leasing demand generally remained weak, especially on the high streets. As a result, high street rents continued to correct, albeit at a moderating pace, contracting by 10.5% in 2017 after plunging 36.8% in 2015 and 2016. Rents in prime shopping centres picked up marginally in the fourth quarter, buoyed by stronger sales and fewer landlords repositioning their shopping centres, but still ended the year down 0.5%.

    Whilst all the signs point towards the rental market finding a floor in the coming 12-months, we believe that an ‘L-shape’ recovery remains likely for the sector given that leasing demand continues to be supported by F&B operators and mid-range fashion and cosmetics retailers rather than luxury brands.

    Terence Chan, Head of Retail at JLL, said: “Rents in both prime shopping malls and along the high streets are expected to gradually pick up and grow in the range of up 0-5% in 2018. New supply of retail space will increase from 307,000 sq ft this year to about 2.9 million sq ft next year but this is unlikely to have a significant impact on the rental market given that Hong Kong’s retail sector has never been a supply driven market. On the leasing front, we are starting to see more retailers offering products and services that accommodate the shrinking size of flats in Hong Kong to help boost sales, such as laundry services in convenience stores. We also expect more retailers to start introducing more experience-based retailing elements in stores to attract shoppers.”


    Hong Kong Prime Retail Indicator – % Change

    Sector Rent


    2018 Rental Forecast
    High Street Shops ▼10.5% ▲0-5%
    Prime Shopping Centres ▼0.5% ▲0-5%



    Industrial Market

    The recovery in external trading volumes continued to be led by the strong growth in air-freight cargo throughput, which was up 10.8% y-o-y in the first three quarters. Container throughput was also up 8.8% y-o-y over the same period but was showing signs of slowing in 2H17.

    Although 3PLs became more active in the leasing market, their requirements remained centred on renewals and cost-saving relocations. Still, a number of 3PLs expanded operations on the back of growing demand from e-commerce trade. Retailers were less active in the market, accounting for just 8% of the total floor space leased in the warehousing market in 2017, compared to the 32% recorded in 2016, yet they remained among the few occupiers seeking to expand.

    The vacancy rate in the prime warehouse increased from 2.3% to 4.0% over the course of the year, largely due to the completion of new supply, where vacancy remained largely concentrated. Still, the market also recorded a net withdrawal of about 67,040 sq ft in the second half as vacated space arising from tenant relocations and downsizing returned to the market.

    Sluggish demand and increasing vacancy contributed to warehouse rents retreating by 3.0% in 2017, while rents of I/O and flatted factories climbed 1.7% and 2.1%, respectively, reflecting the general trends seen in the office market. 

    Denis Ma, Head of Research at JLL, said: “Warehouse rents are expected to stabilise and return to growth in 2018, increasing in the range of 0-5%, against steady improvements in the external trading sector. But cost containment will remain a key theme for occupiers,”

    “The growth in e-commerce sales is slowly starting to translate into stronger demand in the warehousing market and we expect this to continue in 2018. Goods sold through online channels are largely transported by air, which should benefit warehouses closer to the city’s airport. The completion of Hong Kong-Zhuhai-Macau Bridge is also likely provide a boost to demand, especially around the city’s major air and sea ports” he added.


    Hong Kong Warehouse Indicator — % Change

    Sector Rents*


    2018 Rental Forecast
    Warehouse q3.0% ▲0-5%
    Flatted Factories ▲2.1% N/A
    I/Os ▲1.7% N/A



    Joseph Tsang, Managing Director and Head of Capital Market at JLL.

    Residential Market

    Our preliminary data shows that capital values of mass and luxury residential surged 14.4% and 15.3%, respectively, in 2017. Rental of luxury residential climbed 2.9%.

    Transaction volumes, on the other hand, continued to fall short of historical levels; especially in the secondary market where average monthly sales in the first ten months of 2017 amounted to just 3,462 transactions, 7.9% less than during SARS in 2003. Average monthly sales of new homes over the same period was broadly stable at 1,594 transactions, highlighting the lack of sales in the secondary market.

    Joseph Tsang, Managing Director and Head of Capital Market at JLL, said that the shutdown of the secondary sales market was one of the reasons behind Hong Kong’s housing woes and suggested that the government urgently review all cooling measures to get the market functioning properly again and had the following suggestions:

    1. For upgraders, extend the Double Stamp Duty rebate grace period or allow buyers to pay the levy in phases.
    2. Allow higher LTV ratios for upgraders.
    3. Separate treatment for the primary and secondary sales market. Relax stamp duties and LTV ratios in the secondary market to rebalance market focus.

    There are about 1.2 million units in secondary market. Unlocking this supply could provide more choices to buyers and help reconnect the upgrading chain by redirecting buyers to secondary market. This could potentially allow price setting to be more dynamic in secondary market.

    The initial rise in borrowing rates has had little impact on buying demand with sales in the primary market remaining largely intact even as benchmark HIBOR has steadily increased. About 93% of all new mortgages are referenced to HIBOR.

    “In view of recent record highs being achieved in the market and wave of new supply coming online, we expect the luxury segment of the residential market to continue perform strongly, lending support to further price growth. Demand for mass residential will also remain strong, though sales momentum will slow given the strong growth in housing prices this year and the expected interest rate rise. We believe residential capital values will rise by about 10% in 2018 but potentially by as much as 20% under the right circumstances.” said Tsang.


    Hong Kong Prime Residential Indicator – % Change

    Sector Capital Values*




    2018 Capital Values Forecast 2018 Rental Forecast
    Luxury ▲15.3% ▲2.9% ▲10% q0-5%
    Mass ▲14.4% NIL ▲10% NIL



    Investment Market

    Investment volumes into commercial and industrial real estate, in terms of total consideration and number of transactions soared by 74% and 31%, respectively, in 2017. Growth was padded by a number of record breaking transactions and the return of PRC capital in the second half. About 31% of total investment volume was from PRC buyers in 2017, up from 29% in 2016. 

    Capital values of Grade A office surged by 17.5% in 2017, the strongest growth among the sectors. Growth was supported by strong government land sale results, including the sale of the Murray Road Carpark in May, which reset pricing benchmarks in the office market across the city. Capital values of high street shops continued to retreat, down 11.1% but off thin volumes while speculation around the resumption of the government’s successful industrial building revitalisation policies contributed to warehouses and flattered factories increasing by 6.6% and 3.4%, respectively.

    Joseph Tsang, said: “The limited supply of Grade A office assets available for sale may hinder investment volumes in 2018. Notwithstanding, we believe that there is still sufficient demand for capital values to rise a further 10%. The Government’s review of industrial building revitalisation scheme is already drawing plenty of investors back to the market and this will continue into next year. As such, capital values of industrial properties are likely to rise by as much as 10% next year. Investor interest in retail properties is also likely to gather momentum but attention is likely to be focused on neighborhood assets rather than high street shops.”


    Hong Kong Investment Indicator – % Change

    Submarket / Sector Capital Values*


    2018 Capital Values Forecast
    Prime Office
    Central ▲23.6% ▲10%
    Wanchai/Causeway Bay ▲13.9% ▲5-10%
    Hong Kong East ▲14.4% ▲5-10%
    Tsimshatsui ▲8% ▲5-10%
    Kowloon East ▲5.4% ▲0-5%
    Overall ▲17.5% ▲5-10%
    Prime Retail
    High Street Shops ▼11.1% ▲0-5%
    Prime Shopping Centres ▼0.5% N/A
    Warehouse ▲6.6% ▲0-5%
    Flatted Factories ▲3.4% ▲5-10%
    I/Os ▲10.7% ▲5-10%



    (From the Left) Terence Chan, Head of Retail at JLL; Joseph Tsang, Managing Director and Head of Capital Market at JLL; Alex Barnes, head of HK Markets at JLL; Denis Ma, Head of Research at JLL.




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