• Retailers are in survival mode as headwinds multiply

    25 March 2020

    (24 March 2020, Hong Kong) Knight Frank launches the latest Hong Kong Monthly Report. Many office tenants, both local and multinational, have tended to delay or put on hold their real estate decisions, resulting in low levels of leasing activity. Similar to the situation on Hong Kong Island, activity in the office leasing market on Kowloon side remained low. In the residential market, as both buyers and sellers have become more vigilant amid the volatile economy, sales activity remained low during the month. For the retail sector, we expect many retailers to redistribute their retail footprint in Hong Kong and the market to recalibrate to cater for the local demand, resulting in greater diversity in retail offerings.

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    Grade-A Office                                                                                                         
    Hong Kong Island

    With the rampant spread of COVID-19 worldwide, business sentiment has been severely affected. The weaker global economy and the across-the-board impact of the virus has made businesses very cautious. Many office tenants, both local and multinational, have tended to delay or put on hold their real estate decisions, resulting in low levels of leasing activity.

    Landlords in general have been more flexible in lease negotiation and more willing to offer favourable renewal terms to retain tenants. Since vacancy rates remained relatively low, we do not see any possibility of substantial rental reductions. Instead, we expect mild downward adjustments in rents in the coming months.

    Kowloon

    Similar to the situation on Hong Kong Island, activity in the office leasing market on Kowloon side remained low. Most of the deals were renewal leases of small-to-mid-size units of less than 5,000 sq ft. As cost-savings gain priority, leasing activities were largely dominated by renewals, unless the new space has significantly lower rents which would allow tenants to considerably reduce occupancy costs.

    As the COVID-19 outbreak has been declared a pandemic, this will inevitably exacerbate market volatility and negative sentiment. The office market will be significantly dampened in the near-term. Coupled with mounting vacant office stocks, rents in Kowloon are expected to see visible shrinkage in the coming months.

    Residential

    The rapid spread of COVID-19 around the world has further eroded market confidence and dampened the city’s property market. As both buyers and sellers have become more vigilant amid the volatile economy, sales activity remained low during the month. Developers offer more flexible packages and payment terms to sell unsold units in the primary market.

    Meanwhile, potential homebuyers in the secondary market are grabbing the opportunity to negotiate a lower price in the downbeat market. Transactions at major estates were recorded at discounts ranging from 2% to 8%.

    With the twice unexpected interest rate cuts in the U.S., HKMA followed suit by lowering its base rate. Hong Kong home market would benefit as HIBOR stays low for the foreseeable future. However, we expect buyers to remain prudent in the short term as economic uncertainties and the various headwinds will continue to curb buyer confidence.

    Retail

    Hong Kong’s latest retail sales figure recorded a significant drop of 21.4% YoY in January as the outbreak of the coronavirus deterred mainland visitor arrivals, disrupted consumer activity and curbed market sentiment.

    Many retailers and F&B operators suspended their operations temporarily to limit losses.

    As the COVID-19 impact on markets continues to grow, it has shaken up the local retail landscape. The current retail scene shows that retailers who target local clientele have regained their pivotal role, while the luxury segment and other retailers relying on Mainland visitors no longer dominate. From a long-term perspective, we expect many retailers to redistribute their retail footprint in Hong Kong and the market to recalibrate to cater for the local demand, resulting in greater diversity in retail offerings. Looking ahead, we expect the COVID-19 pandemic to have a long-term impact on Hong Kong’s retail scene and for it to be a long journey for the retail sector on the road to recovery.

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