Knight Frank’s latest Hong Kong Monthly Report highlights the property market’s performance across different sectors.
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In July, Hong Kong’s office market remained soft, with Grade A rents continuing to decline and a record high vacancy rate, despite rising demand for new and fully fitted buildings. Kowloon office demand began to pick up in July after a quiet period. Hong Kong’s residential prices have dropped to their lowest level in nearly eight years due to first-hand price reductions, high interest rates, and economic uncertainty. Given the weak total retail sales and restaurant turnover, the overall retail market remains challenging.
Grade A Office
Hong Kong Island
Market sentiment in July remained soft. The average Grade A office rent on Hong Kong Island fell to HK$62.8 per sq ft, down 2.6% year-to-date. The office vacancy rate reached a record high of 13.5% amid weak leasing demand.
Despite foreign law firms downsizing and the finance sector underperforming, demand for new Grade A office buildings has increased due to flight-to-quality trends that have persisted, fuelled by lower rents. Fully fitted units are in high demand.
The outlook for the office leasing market on Hong Kong Island remains challenging, along with the high vacancy rate and ample future supply, will continue to weigh on Grade A office rents.
Kowloon
Office demand began to pick up in July after a quiet period. While the average transaction size remained below 3,000 sq ft, new leasing transactions increased by over 20% month-on-month. Among the various sub-districts, Kowloon East continues to be the primary focus for tenants, with occasional interest in Kowloon West.
Leasing demand has shifted from mainly government institutions and companies from the Chinese mainland to a broader range of sectors, including insurance. The recovery in Kowloon’s Grade A office market is driven by existing businesses expanding and a preference for higher-quality spaces.
Overall, Kowloon shows signs of stabilisation as we enter the second half of the year.
Residential
Hong Kong’s home prices have dropped to their lowest level in nearly eight years due to first-hand price reductions, high interest rates, and economic uncertainty. Total residential transactions fell for three months after peaking at over 8,500 in April, with secondary luxury properties selling at significant discounts.
In contrast, the residential rental market continued to outperform, with rents reaching a four-and-a-half-year high. A wait-and-see attitude prevails among prospective homebuyers, some of whom are shifting to renting. The supply of rental properties remained low during the summer, and listings were quickly absorbed.
Looking ahead, both homeowners and buyers are adopting a wait-and-see attitude amid high interest rates. The market expects a high chance of the first Fed rate cut in September, yet the pace of local banks to follow suit is uncertain. A slowdown in home price declines may occur in the second half of 2024, but a rebound this year seems unlikely.
Retail
Retail sales across various categories remained weak, with a 9.7% year-on-year drop in June 2024. Large retail shops in core shopping districts are vulnerable, leading landlords to accept short-term leases or sublet to multiple tenants.
Restaurant operators are also struggling due to lower spending from locals traveling north, with receipts down 15% QoQ and 5% YoY in Q2 2024. Some multinational chains decided to downsize or exit Hong Kong market. The overall retail market remains challenging, given the weak total retail sales and restaurant turnover, which have been negatively affected by the northbound travel habits of many local residents. Investors are expecting a rate cut in the near future and anticipating more capital inflow to activate the market. However, with the National Holiday and other holidays approaching, an increase in tourism activity is expected, boosting foot traffic and spending as 2024 concludes.