• Interest rate uncertainty

    11 December 2014

    HONG KONG, 9 December 2014 –Hong Kong’s office, residential and industrial property markets recorded moderate growth in 2014 on the back of a moderately growing economy. Next year, potential interest rate rises, heightened policy risks and a growth in new housing supply will weigh on the residential market. In the retail market, mainland tourists’ changing shopping patterns are expected to dampen the city’s retail sales growth and lead to a rent correction on high street shops in core shopping districts, according to JLL Hong Kong in its Yearend Property Review 2014 published today.

    Office Market

    Leasing activity in the office market has improved this year with overall net absorption in the first 11 months amounting to 905,000 sq ft (net), compared with a negative take-up of 269,300 sq ft in 2013. Full-year net absorption, however, remained lower than the historic long-term trend level of 2 million sq ft per annum for the third consecutive year.

    The Central office market returned to growth in 2014, led by relatively stronger demand for the top-end of the Grade A office market in buildings such as Two IFC and Cheung Kong Center. Outside of Central, the redevelopment of Swire Properties’ Cornwall House and Warwick House in Quarry Bay helped underpin leasing activity in Hong Kong East and Kowloon East as affected tenants sought alternate office accommodation ahead of the demolition of the two buildings.

    By sector, the finance, insurance, real estate and business services (FIREBS) sector remained as the main driver of leasing demand though requirements were generally restricted to partial floor units. Business centres were one of the few tenant groups that sought whole floor premises as they continued to expand to meet the strong demand for smaller, cost-effective workplaces. Landlords also continued to look at innovative ways to build occupancy, including leasing to destination retailers, medical centres, gyms and education service providers.

    With the improvement in leasing demand and investment activity in non-core area locations, vacancy rates across all submarkets decreased over the course of the year. The vacancy rate in the overall market was down to as low as 3.9% at the end of the third quarter before rising slightly to 4.1% by the end of November on the completion of new supply. The occupancy level in Central dropped from 4.6% in the fourth quarter of 2013 to a 3-year-low of 3.7% in the fourth quarter of 2014. Tsimshatsui was the tightest market for space availability with the vacancy rate dropping to 1.1% by the end of November, the lowest level since 2000.

    Central office rents returned to growth in 2014 for the first time since 2011, up 2.6% through the first 11-months of the year. Top-tier (i.e. Grade A1) office rents grew by 8.8% through the first 11-months as the vacancy rate falling to less than 2% with rents at Two IFC surging 6.1% in the second half. With vacancy rates tightening, rents stayed firm across all the other key office submarkets except Kowloon East where rising competition from the completion of new office supply and the refurbishment of old industrial buildings for office-use saw rents dip 0.5% through the first 11-months of the year. Ben Dickinson, Head of Markets at JLL, Hong Kong, said: “We expect leasing demand to continue to improve in 2015 on the back of a moderate economic growth in Hong Kong. Citigroup’s acquisition of the East Tower of One Bay East in Kwun Tong has led several international banks to reconsider their long-term real estate options in the city and some are already looking at office space in non-core locations. Although an estimated 2.2 million sq ft of new Grade A office supply is scheduled for completion in 2015, office supply in core business areas remains tight and most new supply is located in non-core business areas. Office rents in major business districts are expected to grow 0-5% next year, but rents in Kowloon East will likely continue to face some downside risks brought about by new supply.” Jill1

    Retail Market

    Total tourist arrivals into Hong Kong continued to grow at a healthy level this year, up by 12.1% y-o-y between January and October, and slightly higher than the 11.7% growth recorded in 2013. Arrivals from mainland China increased by 15.5% y-o-y, contributing to about 78% of all visitor arrivals (49.9 million). Among the visitors from the mainland, about 66% arrived under the China Individual Visit Scheme with the total number of visitors using the scheme increasing by 14% y-o-y. As a result, the number of same-day visitors from the mainland grew by 18.1% y-o-y, with overnight visitors increasing by 11.9% y-o-y. The increase in tourist arrivals, however, was not strong enough to support the further growth in retail sales in 2014 as witnessed in previous years.

    Retail sales were down by 0.2% y-o-y in January-October, against an average annual growth rate of 11.3 % between 2004 and 2013. Weakening retail sales was a result of sales of jewellery and watches plunging 14.4% y-o-y in January-October with many citing the mainland’s anti-corruption campaign and changing spending patterns of mainland tourists as the reason for the pull-back in demand for luxury goods in Hong Kong. In contrast, retail sales of medicine and cosmetics grew 9.7% y-o-y, benefiting from the shift in mainland visitors spending patterns towards daily necessities. The drop in retail sales growth led to big-ticket item retailers, who have been aggressive in expansion and bidding up rents for retail shops over the last few years, adopting more conservative growth plans this year, particularly in the second half.

    Retail rents of prime shopping centres climbed only 0.1% in the second half of 2014 after growing by 0.9% in the first half. The slowdown in retail sales had a greater impact on high street shops where rents declined 0.6% in the second half after a 0.8% growth in the first six months. Shops in fringe streets facing higher vacancy rates saw greater rental pressure. The correction in high street rents for the year, however, was restricted to only certain districts, namely Central and Mongkok. Tom Gaffney, Head of Retail at JLL, Hong Kong, said: “The anti-corruption crackdown in mainland China and changing shopping patterns of mainland tourists is still expected to weigh on retail sales growth in 2015.

    But the healthy inbound tourism market and steady local labour market will support retail sales. International retailers should remain keen on opening stores given the maturity of the local retail market. Of course, they will adopt a more pragmatic approach towards expansion. We expect retail rents in most prime areas to remain broadly stable in 2015. With the support of tight vacancy and long waiting lists, rents for prime shopping centres will hold up well. Shop rents on fringe streets in core shopping areas, however, will likely continue to face further downside pressure.”

    Jill2 Industrial Market

    Benefitting from the continuing improvement in external trade (Total exports and imports up by 3.8% y-o-y and 4.4% y-o-y, respectively, through January-October) and corporate outsourcing requirements, third-party logistics returned to the warehouse leasing market with vigour in 2014, accounting for 59% of all new lettings, by floor area, during the year.

    Combined with tight supply and record-breaking rents in and around the port area, demand has gravitated towards non-core locations such as Tuen Mun and Sheung Shui; accounting for 57% of all new lettings, by floor space, compared with just 20% in 2013. The availability of warehousing space in the city remained tight, with the vacancy rate standing at just 4.2% by the end of November. The improving market situation saw warehouse rents grow by 11.5% y-o-y in 2014.

    The stronger tenant interest in warehouses in noncore locations brought about by tenants seeking more cost-effective options led to higher rental growth in these locations. Rents for I/O and Flatted Factories properties recorded 8.2% y-o-y and 15.1% y-o-y growth, respectively, in 2014, but softening office rents in Kowloon East led to a slowdown in rental growth in the second half. Ricky Lau, Head of Industrial at JLL Hong Kong, said: “Improvements in the external trading environment and domestic retail sector are expected to continue to lend support to warehousing demand in 2015. But rental growth will mainly be driven by the growth in the lower-end market as rents in the top-end have already reached a high level. We expect warehouse rents to grow by 0-5 % y-o-y in 2015.” Jill3

    Residential Market

    The government’s relaxation of the conditions associated with the double stamp duty measure in May contributed to the release of pent-up demand in the housing market and boosting property sales by 25.6% y-o-y to more than 57,700 units between January and November. Despite a slip in transaction volumes in November to 4,848 units, new projects such as Dragon Range in Kau To Shan and The Parkside in Tseung Kwan O still recorded strong sales.

    In the luxury market, sales of residential properties worth over HK$20 million also rebounded in the second half, leading overall volumes this year to increase by 39% y-o-y based on preliminary data. Sales of luxury homes worth HK$30 million to HK$50 million increased by 52% y-o-y this year, the strongest growth in the high-end residential sector. This was followed by sales in the HK$50 to HK$100 million segment, which rose by 45% y-oy. Sales of new projects dominated the overall housing market. With developers resorting to offering discounts and incentives to lure buyers, the primary sales market accounted for about 69% of sales of luxury flats worth over HK$20 million in the second half of this year.

    Most of the new projects launched during the year were wellreceived, especially in the second half. Discounts and stamp duty rebates helped sweeten property sales. Asking prices of new projects were also largely on par with secondary home prices nearby. The recovery in sales volume led property prices to rebound in the second half after prices of mass-market and luxury residential homes declined 1.0% and 1.5%, respectively, in the first half. For the whole year, capital values of mass and luxury residential properties grew by 5.7% and 2.3%, respectively.

    In the leasing market, demand for luxury residential properties was weak in the first half but pick-up was noticeable in the third quarter, leading to rents stabilising. Rents of luxury residential properties, nevertheless, still down by 4.1% in 2014. Joseph Tsang, Managing Director and Head of Capital Markets of JLL Hong Kong, said: “We expect sales volume to continue to be largely driven by end-user demand over the near-term. The primary sales market will continue to drive sales momentum – we expect more new launches in 2015, new units will be smaller and will likely be offered at competitive price levels.

    Developers will need to continue to offer benefits to attract buying interest. Home prices are likely to continue to face downside risks in 2015 due to the potential rise in interest rates and heightened policy risks. But pent-up demand and rising construction costs should prevent developers from having to cut prices significantly. With moderate growth forecasted for the local economy, leasing demand in the mid-end luxury residential sector should continue to improve.” Jill4

    Investment Market

    Despite the higher stamp duty charges, which have increased transaction costs, 2014 saw rising numbers of investors returning to the local property market seeking long-term investment opportunities. Investment demand, however, continued to be largely underpinned by end-users as well as long-term investors. Investors primarily targeted assets with value-add or upside growth potential in non-core area markets.

    The total value of investment worth over HK$100 million across the four key property sectors increased by 16.0% y-o-y from HK$64.6 billion in 2013 to HK$75.0 billion in 2014. From January to November, a total of 222 transactions were registered for properties sold for more than HK$100 million (excluding land auctions), up 2.3% from the 217 transactions recorded in 2013 and a big improvement on the about 40% y-o-y fall in 2013.

    Residential and retail properties attracted the greatest amount of investment capital, with the total consideration accounting for 70% of the whole market, followed by office (17%) and industrial (13%). Properties in non-core shopping locations attracted the investment focus. The market recorded 72 transactions with a total consideration of HK$24.4 billion, up 26% and 112% from the 57 transactions and HK$11.5 billion recorded in 2013.

    In comparison, the office investment market was relatively subdued in 2014. Despite the completion of several landmark en-bloc transactions, only 37 transactions worth over HK$100 million with a total consideration of HK$19.0 billion were recorded, compared with 48 deals with HK$28.2 billion in 2013. With the office and retail rental markets starting to slow in the second half, investors shifted their focus to the industrial market where more value-added opportunities were available through the government’s industrial revitalisation scheme.

    Combined with improving market sentiment and higher upside potential, the capital value of warehouses, flatted factories and industrial/offices surged by 15.6%, 10.8% and 6.9%, respectively, in 2014, the strongest growth among the four property sectors. “For the market outlook in 2015, an improving economy will support the property investment demand. Investors will continue to hunt for properties with value-added potential in non-core areas,” said Tsang. “There may be increasing pressure on capital values arising from resurfacing concerns over interest rate hikes. We expect capital values of warehouses to be the top performer in 2015, growing by 5-10%. Grade A office prices will largely remain stable while capital values of high street shops and residential properties are likely to face some downside risks”.


    Natural and Organic: Red Dunes Playtopia Video credit: CHENIN Studio

    World Architecture Festival 2022 took place in Lisbon, the 2023 edition will hold from 29 Nov - 1 Dec at Singapore.


    no images were found