• Rents in the CBD hit hardest amid cost-saving measures

    24 April 2020

    Knight Frank launches the latest Hong Kong Monthly Report. The COVID-19 pandemic continues to depress office rents during the month. In the residential market, the overall residential price has dropped by 6.6% from the peak in May last year, but luxury residential prices are unlikely to fall off the cliff, given the combination of strong holding power of owners and scarcity.

    In the short term, mass residential prices are expected to be more volatile. In the retail market, we forecast that retail sales value will hover at a low level in the first half of this year, with a slight improvement in the second half if the epidemic is mitigated, while rental performance is expected to continue to fall this year.

    Grade-A Office 

    Hong Kong Island

    The COVID-19 pandemic continues to depress office rents during the month, with rents in Central and Admiralty extending the decline to 11 consecutive months. With current rents adjusted significantly downwards, cost-conscious occupiers started to seek bargain deals in the down market, triggering more leasing activity than in the previous month.

    The COVID-19 pandemic has forced companies to adopt work-from-home and split-team operation arrangements, which has led to the growing use of technology and a reduction in onsite staff in the office. Whether these changes will result in a long-term structural change to the Hong Kong workplace remains to be seen. But many occupiers are now considering their operations and exploring the feasibility of agile and flexible office space, office utilisation rates and remote working.

    Kowloon

    Office-leasing activity on Kowloon side remained sluggish, with an increasing number of tenants undertaking a wait-and-see approach in March. Leasing activity was dominated by renewal leases and a handful of cases of expansion and relocation in lower unit rents.

    During the month, more tenants adopted remote virtual inspections as an alternative to on-site inspections amid the public gathering ban by the government as one of the anti-epidemic measures. As economic uncertainty mounts, we expect the higher-end buildings in Kowloon to see stronger downward pressure in rents.

    Residential

    As the unemployment rate is picking up, purchasing sentiment in the mass residential market has been further eroded. According to the latest official figures, overall residential price has dropped by 6.6% from the peak in May last year. With demand shrinkage, the luxury residential market was quiet, with low transaction volume. The asking prices for luxury properties stayed largely flat, however, as most landlords are in a stable financial position. This is in contrast to conditions in the mass residential market, where some property owners were desperate to cash in by selling their units, so prices continued to be under pressure.

    Looking ahead, luxury residential prices are unlikely to fall off the cliff, given the combination of strong holding power of owners and scarcity. In the short term, mass residential prices are expected to be more volatile.

    Retail

    The Hong Kong retail market recorded the worst performance in a decade, as residents avoided going out, and travel restrictions kept tourists away.

    The luxury retail sector collapsed after months of social unrest, followed by the COVID-19 pandemic. Luxury brands closed their stores one after another, with some leaving the market temporarily.

    With luxury brands struggling to survive, tenants with lower rental affordability but stable sales performance, such as supermarkets, fitness centres and homes for the elderly, seized the opportunity in the downbeat market to expand their presence. We forecast that retail sales value will hover at a low level in the first half of this year, with a slight improvement in the second half if the epidemic is mitigated. Total retail sales value in 2020 is expected to return to the level in 2010, at about HK$320 billion. As the retail market is undergoing a structural change, rental performance is expected to continue to fall this year.

    For further information, please visit KnightFrank.com.hk.

    To download report, please click here.

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