• 2019: A challenging year for HK’s commercial property market

    11 December 2018

    (10 December 2018, Hong Kong) Uncertainties arising from the US-China Trade War has led to a slowdown in rental and capital value growth of commercial properties in the second half of 2018. Hong Kong’s commercial property market will continue to be clouded by the trade war in 2019. Capital values of Grade A office will drop up to 10% next year after it hits the historic record high this year, according to JLL’s Year-end Property Market Review and Forecast published today.

    (left to right)Ben Dickinson, Joseph Tsang, Terence Chan

    Highlights of the report:

    • PRC companies accounted for just 30% of all new lettings in Central’s office market in 2018, dropped significantly from the 48% in 2017.
    • Demand for office space will continue to soften in 2019 due to the uncertainties in economy.
    • The extremely tight vacancy environment will support Grade A Office rents to grow 0-5% in 2019.
    • Rents in High Street Shops to soften in the range of 0-5% in 2019 but Prime Shopping Centre rents should hold firm, up 0-5%.
    • The recovery in retail sector in the second half will lose momentum next year.
    • Total investment volume of commercial properties will fall in 2019 after it hits the record HKD157.4 billion this year.
    • Only 8% of total investment in commercial properties was from PRC investors in the second half, compared to 28% in the first half.
    • Capital values of Grade A Office and High Street Shops to fall 10% and 0-5%, respectively, in 2019 while industrial property are expected to buck the trend and hold firm, up 0-5%.


    Office Market

    Grade A office’s net absorption amounted to about 2.8 million sq ft in 2018, reaching a three-year high. Demand for office space softened noticeably in the second half, especially from PRC companies, which accounted for just 30% of all new lettings in Central in 2018 compared with 48% in the previous year. Tenant decentralisation remained a key theme in the leasing market with more multi-national corporations opting to relocate to more cost effective locations.

    The availability of space, however, remained tight with vacancy rates down below 2% across all submarkets this year except Kowloon East. The vacancy rate in Central remained at close to historic lows. With 76% of all new private commercial Grade A office space completed in 2018 already leased and about 72% of new office space scheduled for delivery in 2019 pre-leased (44%) or under negotiation, the current low vacancy situation is likely to remain over the short-term. The next wave of new supply will not reach the market until 2021. 

    Central’s Grade A office rents grew 7.5% to an average of HKD 127.4 per sq ft per month and continued to reach new heights in 2018. Overall office rents grew 7.0% this year, but growth momentum slowed across most submarkets in the second half.

    Joseph Tsang

    Ben Dickinson, Head of Agency Leasing at JLL, said: “Demand for office space will continue to soften in 2019 due to the increasing uncertainty in the city’s economic outlook arising from a slowing mainland China economy and uncertainty around the US-China trade war. Weaker demand will put upward pressure on vacancy rates and translate into slower rental growth. But the current extremely tight vacancy environment will support office rents to grow a further 0-5% next year. Central and Kowloon East forecasted to post the slowest growth with Central the most exposed to slowdown in PRC demand.”


    Hong Kong Prime Office Indicator – % Change

    Submarket Rents*


    2019 Rental Forecast
    Central ▲7.5% ▲0-5%
    Wanchai/Causeway Bay ▲7.7% ▲0-5%
    Hong Kong East ▲7.4% ▲0-5%
    Tsimshatsui ▲5.8% ▲0-5%
    Kowloon East ▲3.9% ▲0-5%
    Overall ▲7.0% ▲0-5%




    Retail Market        

    Total retail sales increased 10.6% y-o-y in the first ten months of the year, after expanding for 2.2% y-o-y in 2017. If sustained for the full year, it will be the best performance since 2013. The improvement in retail sales coincided with a 13.0% y-o-y increase in mainland China arrivals over the same period.

    Strong retail sales continued to attract new market entrants to the city. Newcomers, however, continued to show a strong preference for shopping centres with 48% opting to open their first store in shopping centres, compared to 45% in the previous year. New entrants from Japan were the most aggressive in expanding in the Hong Kong market.

    Improving retail sales and tightening vacancy contributed to High Street Shop rents rising for the first time, up 1.6% in 2018, after plunging 43% over the previous three years. F&B operators and mass retailers, notably personal care and pharmacy retailers, continued to drive leasing momentum.

    Terence Chan, Head of Retail at JLL, said: “The recovery of the retail sector seen in the second half of the year is expected to lose momentum next year as a depreciating RMB and softening local consumer sentiment hit sales. The opening of new cross-border transport links may partially offset the negative impact but unlikely to reverse broad trends. We expect High Street Shop rents to soften in the range of 0-5% in 2019. Sustained retailer interest for shopping centres, however, will see rents in Prime Shopping Centres hold firm, up 0-5%.”


    Hong Kong Prime Retail Indicator – % Change

    Sector Rent


    2019 Rental Forecast
    High Street Shops ▲1.6% ▼0-5%
    Prime Shopping Centres ▲1.5% ▲0-5%




    Investment Market

    Preliminary data shows total investment into commercial and industrial property dropping 35% in 2018 after reaching a record HKD 157.4 billion in 2017. Investment volume into retail properties recorded the sharpest decline, down 66%, in the absence of large portfolio sales. Growing uncertainty in the macro-economic outlook along with rising interest rates contributed to investment volume in the second half plummeting by 72% from the first half. 

    PRC investment into Hong Kong’s commercial and industrial property markets was up 22% to HKD 24.4 billion in 2018. However, interest from the cohort fell noticeably in the second half due to the uncertainties in the mainland economy and stricter enforcement of capital controls. Only 8% of total investment in commercial and industrial property markets in the second half was from PRC investors, compared to 28% in the first half.

    Uncertainties stemming from an escalating trade tensions between the US and China led to weaker volumes and slower capital value growth in the office and warehouse market. Capital value of Grade A office climbed 2.7% in the second half after surging by 10.8% in the first half. Supported by an improvement in retail sales, capital values of high street shops returned to growth and climbed 1.1% for the first time since 2014.

    Joseph Tsang, Managing Director at JLL, said: “We expect investment volume in 2019 to fall as a dour outlook for the local economy and rising interest rates drives investors to the sidelines. PRC demand will remain subdued with China unlikely to loosen capital controls amid a slowing economy. Capital values of Grade A Offices and High Street Shop will fall 5-10% and 0-5%, respectively, next year. But capital values of industrial property are likely to hold steady, up in the range of 0-5%, thanks to the government’s new round of revitalisation policies.” 


    Hong Kong Investment Indicator – % Change

    Submarket / Sector Capital Values*


    2019 Capital Values Forecast
    Prime Office
    Overall Grade A office ▲13.8% ▼5-10%
    Prime Retail
    High Street Shops ▲1.1% ▼0-5%
    Warehouse ▲9.1% ▲0-5%
    Flatted Factories ▲6.7% ▲0-5%



    Click here to download the slides of the report. For further information, visit jll.com.





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