The worst could truly be over for the Hong Kong property market 

Rents have bottomed out and the economy bodes well for capital value growth in the second half of 2021.

Following its longest and deepest recession in history, the Hong Kong economy returned to growth in H1 2021. The city’s containment of the pandemic and the start of local vaccination programmes boosted overall market confidence and underpinned an improvement in leasing and investment momentum across key commercial property sectors over the past six months. The bottoming-out rents and anticipated economic recovery will support investment demand and hence capital value growth in H2 2021, according to the CBRE Hong Kong 2021 Mid-Year Market Outlook.

“Hong Kong’s economic outlook turns more upbeat as the local pandemic is more contained while labour market conditions gradually improve.  Low-base effect will likely ensure sustained positive GDP growth in the rest of 2021. Unemployment also declined for a third consecutive month in May, falling to 6%. Real estate market recovery will likely be most pronounced in the office and retail sectors, where mainland Chinese companies and tourists account for a meaningful share of leasing and consumption demand, respectively,” says Marcos Chan, Executive Director and Head of Research, CBRE Hong Kong.

Review and Commentaries

Grade A Office

• Grade A office gross leasing volume increased by 41.9% q-o-q to 1.2 million sq. ft. in Q2 2021, bringing the half-yearly total to 2.1 million sq. ft, 107.1% higher than the same half-yearly period in 2020. The rise was underpinned by stronger leasing activity among banking and finance firms, which accounted for 21.0% of this quarter’s leasing volume, compared to 16.8% and 8.8% in Q1 2021 and Q4 2020, respectively.

• Overall net absorption stood at -322,100 sq. ft. in Q2 2021, marking the seventh consecutive negative quarterly figure. The duration of this leasing market downcycle is currently on par with the longest one in history registered between 2001 and 2003. All submarkets recorded negative net absorption in Q2 2021 except for Kowloon East, which registered +142,100 sq. ft.

• Overall vacancy climbed 0.5-ppt in Q2 2021 (and by 0.9-ppt in H1 2021) to 10.8%. Total vacant space totalled 8.8 million sq. ft., a new record high.

•  Overall rents continued to contract, albeit at a slower rate, falling 2.1% q-o-q in Q2 2021. This brought the y-t-d decline for H1 2021 to 5.3%.

Ada Fung, Executive Director, Head of Advisory & Transaction Services – Office Services, CBRE Hong Kong: “Should quarantine requirements be loosened, office leasing demand from mainland Chinese companies is expected to pick up, with properties located in and around the Central CBD set to benefit in particular. While the rents are forecast to reach the bottom this year, high vacancy and an upcoming supply boom will ensure that rents stay low for longer. Corporate tenants should tap the opportunity to review their real estate strategies and bargain for the best deals.”

Retail

• Ongoing travel restrictions ensured that inbound visitors remained almost non-existent. However, total retail sales continued to rise from a low base, with April and May combined to climb 11.2% y-o-y. This brought the y-t-d growth for the first five months of 2021 to 8.9% y-o-y. 

• While leasing momentum improved in the F&B and casualwear categories, luxury and cosmetics retailers displayed no expansionary demand. High-street shop vacancy fell to 15.4%, the lowest since Q2 2020.

• The slight pickup in demand helped high-street shop rents increase by 1.2% q-o-q, the first gain witnessed since Q2 2018, and the strongest quarterly growth since Q4 2013. Landlords are regaining confidence gradually as retail sales rebound.

• The gradual relaxation of social-distancing measures helped improve footfall. Shopping mall rents were unchanged despite the absence of tourist-related demand.

Lawrence Wan, Senior Director, Advisory & Transaction Services – Retail, CBRE Hong Kong: “With local and global vaccination rates gradually picking up and the HK$36-billion supportive digital voucher scheme launched by the Hong Kong SAR Government, brighter business prospects and lower rents will encourage some retailers to commit to new leases, leading to stronger leasing volume and higher occupancy in H2 2021.”

Industrial

• Hong Kong’s aggregate trade registered an impressive growth of 25% y-o-y in April and May combined, partly due to strong demand for electronic goods. Airfreight volume continued to improve, rising by a further 11.1% y-o-y over the same period, but container throughput increased by just 6.4%.

• Industrial leasing momentum was stable amid a steady flow of leases by companies in the e-commerce, cold-storage and daily necessities segments. However, a few retailers downsized in the warehouse market.

• Warehouse vacancy was flat, falling by 0.02-ppt to 3.2%.

• Warehouse rents rose for the second consecutive quarter, edging up by 0.8% q-o-q, bringing the y-t-d growth to 1.9%.

Samuel Lai, Senior Director, Advisory & Transaction Services – Industrial & Logistics, CBRE Hong Kong: “As the e-commerce penetration rate is expected to grow in established markets like Hong Kong, demand for additional logistics space will increase to support this growth. However, given limited new supply from the Government’s land sale programme and continued initiatives to encourage industrial redevelopment, the total stock of industrial properties will continue to shrink and thus industrial rents are solidly supported and enjoying mild growth since Q1. These reasons will continue to ensure leasing demand from occupiers in the affected buildings.”

Capital Markets

• Investment activity continued to gain momentum in Q2 2021, with HK$25.1 billion worth of commercial property (deals over US$10 million) changing hands. Investment volume for office, retail and industrial properties all registered growth.

• Strong demand from institutional investors seeking industrial properties, along with the reported sale of KITEC in Kowloon Bay, pushed up commercial property investment volume to HK$34.7 billion in H1 2021, a figure representing 66% of last year’s full-year total of HK$52.8 billion.

• Property funds spent a total of HK$5.4 billion on four properties in Q2 2021, all in the industrial sector.

•  The industrial property sector contributed 31% of the HK$34.7-billion total investment volume in H1 2021.

Reeves Yan, Executive Director, Head of Capital Markets, CBRE Hong Kong: “The ample availability of capital underpinned upbeat investment sentiment for the duration of H1 2021. Deal flow is expected to improve further in the second half of the year, with counter-cyclical assets such as shopping malls, street shops and hotels likely to be on investors’ radar. En-bloc industrial assets with conversion or redevelopment potential will also be keenly sought after by institutional investors and local developers.”