• Companies with better performance grab expansion opportunity in downbeat market

    28 April 2021

    Knight Frank launches the latest Hong Kong Monthly Report. In the office market, Grade-A office rents on Hong Kong Island continued their slight downward trend. Some companies with better performance are actively looking for expansion options with lower rental costs, though with longer-term lease commitments.

    In Kowloon, leasing demand has been reactivated amid improved business sentiment. In the residential market, demand from homebuyers remained resilient, especially in the luxury market. Hong Kong’s retail market faces challenging prospects, with structural changes in the consumer market landscape and the wider application of e-commerce.

    Grade-A Office                                                                                                         

    Hong Kong Island

    Grade-A office rents on Hong Kong Island continued their slight downward trend. Central recorded a moderate decline in March, with a quarterly drop of 2.7% to HK$113 per sq ft.

    Some companies with better performance are actively looking for expansion options with lower rental costs, though with longer-term lease commitments. Several finance and investment firms relocated from Central to Three Pacific Place in Wanchai to expand their office space to capture the opportunities in the downbeat market.

    With the high activity level in Central, some landlords, especially those with vacancies already backfilled, firmed up their rents. Therefore, we expect the rental level in Central to stabilise in the coming months.

    Kowloon

    More tenants confirmed their real estate plans before the end of the fiscal year, resulting in a significant surge in the number of renewals and new letting transactions in March. Leasing market sentiment was supported by more sizable leases of 10,000 sq ft or above.

    In view of the stabilised COVID-19 situation, the physical occupancy of offices gradually ramped up from about 50% to 75% over the past few months. Leasing demand has been reactivated amid improved business sentiment. We saw an increase in the number of inspections and lease negotiations.

    In line with our previous prediction, we expect a market recovery towards mid-2021, given the effective vaccination programme and border relaxation. We maintain our view that Kowloon office rents should rebound in Q4 2021.

    Residential

    In March, market sentiment was strong, propelled largely by pent-up demand from local end-users and stabilisation of the COVID-19 situation in the second half of the month. According to the Land Registry, monthly transactions in the residential market surged, with 7,444 transactions recorded in March, up 21.5% MoM.

    Although the local economy was still under immense pressure, with a high unemployment rate, the residential market continued to perform steadily. Demand from homebuyers remained resilient, especially in the luxury market. In the second-hand market, more homeowners put their sales plans on hold as they expect the overall market to rebound.

    The revival in leasing activity continued, with most of the transactions being local moves. A few significant transactions in the ultra-prime segment were recorded, surprising the market amid the downturn.

    Looking ahead, as there are signs of COVID-19 cases tapering off amidst the massive rollout of the vaccination programme, we expect market sentiment to remain upbeat. When borders reopen, transaction volume, especially for luxury properties, should enjoy a quick uptick with the return of mainland buyers.

    Retail

    The latest Hong Kong’s retail sales figures indicate that the local retail market has ended the two-year downtrend. According to the Census and Statistics Department, retail sales value surged 30% YoY in February. Luxury sales also skyrocketed by 114% YoY to HK$3.3 billion. However, the sales value was less than half the average sales level of around HK$7 billion per month in 2018.

    Prime shopping streets, which were packed with luxury shops and iconic flagship stores pre-COVID, are transforming, with more mid-priced brands, F&B operators and even fast food chains moving in. Stores previously occupied by large flagship stores on prime shopping streets have been divided into smaller shops, as landlords adopt new strategies to adapt to the down cycle. Hong Kong’s retail market faces challenging prospects, with structural changes in the consumer market landscape and the wider application of e-commerce. But this has also opened up new opportunities for retailers and F&B operators to expand their sales by adopting online-offline strategies.

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

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