• Cost-effectiveness and upgrades drive office leasing market demand

    29 September 2023

    Knight Frank launches the latest Hong Kong Monthly Report. Given the soft market sentiment, the Hong Kong Island office market continued its downward rental trajectory.

    Besides, office leasing activity in August was moderate in Kowloon, with most movement related to reducing costs. In residential market, home-buying sentiment remained weak, given rising Hibor-based mortgage rates and abundant supply. In retail market, retailers and shopping mall operators in Hong Kong are pinning their hopes on the night-time economy to stimulate local spending sentiment and help revive the local retail market.

    Grade-A Office                                                                                                        

    Hong Kong Island

    Given the soft market sentiment, the Hong Kong Island market continued its downward rental trajectory. Overall net effective rents on Hong Kong Island fell 0.2% MoM, or 3% year-to-date (YTD). Among major submarkets, Central/Admiralty experienced the largest rental decline of 4.4% YTD.

    The flight-to-quality trend persisted. On the one hand, some companies from the finance sector took advantage of the favourable environment for tenants and lower rent levels to consolidate and upgrade their office space in prime locations. On the other hand, the decentralisation and downsizing trend continued.

    The challenging outlook for the office leasing market on Hong Kong Island, coupled with the high vacancy rate, will continue to put pressure on Central Grade A office rents in the near term. Over 2023, we expect overall rents on Hong Kong Island to fall by 3% to 5%.

    Kowloon

    Leasing activity in August was moderate, with most movement related to reducing costs. As in July, the majority of the leasing transactions were dominated by small to medium-sized units of under 3,000 sq ft and rents of HK$22 per sq ft or below. Leasing activity from electronics and manufacturing companies was more active during the month.

    Relocation cases dominated the leasing market in August. Most of the relocation deals were recorded in Kowloon East. Size optimisation, consolidation and improved building quality remained the major reasons for relocation.

    Going forward, while some companies will continue to relocate to reduce costs, this will drive leasing demand, supporting stable rent levels for the rest of 2023.

    Residential

    The residential market eased for the third consecutive month in terms of both prices and sales volume. Overall residential prices fell by 1.1% MoM in July, following a revised 1.1% decline in June, according to the Rating and Valuation Department (RVD).

    Home-buying sentiment remained weak, given rising Hibor-based mortgage rates and abundant supply. Homebuyers were more conservative amid the prevailing economic conditions unless offered steep discounts.

    The rental leasing market remained buoyant, with overall residential rentals rising by 1.0% MoM in July, contributing to a 4.4% YTD gain. On the other hand, some big-ticket sales were recorded in the luxury segment despite the sluggish market. Notable leasing transactions were also recorded during the month.

    As developers are poised to launch discounted primary units in the coming months to unload sizable inventory, the primary market is expected to dominate market sentiment, exerting further pressure on property prices in the secondary market for the rest of the year.

    Retail

    Buoyed by the revival in tourist arrivals and the improved labour market, Hong Kong’s retail market remained stable. Total retail sales value in July increased by 16.5% YoY to HK$33 billion, marking the eighth consecutive month of growth.

    The fact that more residents travelled to the Chinese mainland than inbound tourists is rubbing salt into the wounds of the retail market. According to a government announcement, the night-time economy initiative will include extending the operating hours of shopping malls and retail shops on weekends and organising special events. Retailers and shopping mall operators in Hong Kong are pinning their hopes on the night-time economy to stimulate local spending sentiment and help revive the local retail market.

    Overall, we expect retail sales to remain stable in the short term amid the recovery in tourism and local consumption. The retail sector is still battling with unprecedented challenges, however, as it is still seeking a new identity amid keen competition from shopping malls in the Chinese mainland.

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