(29 June 2020, Hong Kong) Knight Frank launches the latest Hong Kong Monthly Report. Office tenants remained cautious and continued to seek downsizing and other cost-saving options. Cost-conscious tenants are more willing to relocate to non-core districts provided that there are higher building standards and more affordable rental levels. In Kowloon, more tenants asked for shorter leases to avoid long-term commitments. In the residential market, with pent-up end-user demand, the mass primary market was active during the month, with a number of new projects massively oversubscribed. Luxury properties were also sought after by buyers. In the retail market, the current down market has led to a reshuffling of the tenant mix and the retailer footprint. We forecast that rents for street shops are expected to continue their steep downtrend in 2020.
Grade-A Office
Hong Kong Island
Heightened political tensions, along with the weak economy and the lingering impact of the COVID-19 pandemic, continued to affect business sentiment. Office tenants remained cautious and continued to seek downsizing and other cost-saving options, resulting in a 30% reduction in office space because of relocations since January 2020. Improving workplace health and safety has become one of the most pressing needs of companies, given the COVID-19 threat. There is stronger demand for superior building specifications and facility management. Cost-conscious tenants are more willing to relocate to non-core districts provided that there are higher building standards and more affordable rental levels.
Kowloon
With the unprecedented level of uncertainty caused by the weak global economy and social conditions, tenants continued to adopt a conservative attitude and preferred flexible lease terms. As a result, more tenants asked for shorter leases, typically of one year, to avoid long-term commitments. Small-scale co-working spaces of about 100 desks or fewer were sought after by tenants, given the flexible lease terms and favourable workplace environment.
Landlords were more willing to adjust their asking rents downward and to pay for higher agency fees to attract tenants.
Residential
Sentiment in the residential market has improved recently although heightened Sino-US tension has weighed on the economic outlook. Purchasing power that accumulated in the past few months has been gradually unleashed, with transaction volume surging 45.9% MoM to 5,984 cases in May. Overall residential prices, which remained resilient under the contracting economy, edged down just 0.1% MoM in May and dropped by 0.8% so far this year, according to the latest official residential price index.
With pent-up end-user demand, the mass primary market was active during the month, with a number of new projects massively oversubscribed. Luxury properties were also sought after by buyers.
In the land sale market, the warm response to the recent government land tenders indicates that developers are still optimistic about the future market despite the recent social and political turbulence.
Looking ahead, uncertainty in the residential market has heightened, given the worsening labour market and deteriorating Sino-US relations. As house price movements usually follow economic and employment conditions, the adverse impact of contracting economic activity on the residential market could gradually emerge later this year.
Retail
Despite the easing epidemic situation, Hong Kong’s retail market remained sluggish during the month, given the collapse in inbound tourism and worsening labour market conditions.
In an economic downturn, people tend to cut down their consumption of luxuries and prefer mid-priced, affordable products and services. This has opened up opportunities for retailers and F&B operators that target the mid-priced market.
The current down market has also led to a reshuffling of the tenant mix and the retailer footprint in the retail market. While some international brands retreated from Hong Kong, some local fitness centre and restaurant chains seek the opportunities to expand. With the soaring retail vacancy rate in the core retail districts, rents for street shops are expected to continue their steep downtrend in 2020. Looking ahead, we expect to see a makeover for Hong Kong’s prime shopping districts as more luxury brands exit, with mass-market and local brands reappearing in prime locations.
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