_Notable upgrade and expansion cases observed in the market

Pressured by the soaring vacancy rate, overall rents on Hong Kong Island dropped further in May. Kowloon office market leasing activity was supported mainly by renewals. In the residential market, market sentiment continued to weaken amid high-interest rates and the bearish performance of the Hong Kong stock market, with the Hang Seng Index slumping to a two-month low. Hong Kong’s retail sales performance continued to benefit from improved consumption sentiment and a sharp rebound in visitor arrivals.

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Hong Kong Island

Pressured by the soaring vacancy rate, overall rents on Hong Kong Island dropped further in May. In the first five months of 2023, overall rents on Hong Kong Island recorded a 2.5% decline. Central district recorded the highest drop of 4.1%.

Despite the rental downtrend, market momentum is improving, and more inspection activity was recorded. The flight-to-quality trend persists, as companies continue to seek prime locations to expand and upgrade their offices at attractive rental levels.

By 2025, approximately 1.83 million sq ft of new office space will enter the Hong Kong office market, primarily in Central and Wan Chai. Apart from financial incentives, some office landlords may provide non-financial incentives, such as flexible leasing packages and fit-outs, to retain and attract tenants, given the high vacancy rate and abundant upcoming supply on Hong Kong Island.

Kowloon

In May, leasing momentum was soft. As in April, most leasing transactions were dominated by sizes under 3,000 sq ft and rents of HK$22 per sq ft or below.

Leasing activity was supported mainly by renewals. Instead of relocating, occupiers tended to renew their leases at more attractive rents offered by landlords.

We also note the growing importance of ESG in occupiers’ considerations. Office buildings with better ESG elements and sustainability criteria are more appealing in the market.

Looking ahead, while some companies are looking for consolidation and expansion, we expect to see more transactions in Q3 with better market sentiment. With Grade A offices experiencing a gradual rebound in demand, we expect overall office rents in the Kowloon market to increase by 4% to 6% for the rest of 2023.

Residential

Market sentiment continued to weaken amid high-interest rates and the bearish performance of the Hong Kong stock market, with the Hang Seng Index slumping to a two-month low.

There were several big-ticket residential sales transactions during the month despite the wait-and-see approach in the market.

On the leasing front, we saw more leasing activity in Mid-levels. The major driver was several residential buildings in the area held by developers for long-term rental purposes being withdrawn from the leasing market. This led to a sudden shortage of flats, as tenants who were renting these flats tended to relocate within Mid-levels, pushing demand and market activity.

Going forward, mass residential prices are expected to remain under pressure, given the headwinds of high-interest rates, the increasing number of new flats and the shrinking labour force. Developers are expected to continue to focus on “destocking”, so primary sales are expected to dominate the market, supported by the active launch of new projects by developers, with lucrative incentives, such as a great variety of mortgage plans and rebates. For full-year 2023, we expect mass residential property prices in Hong Kong to fall by 0% to 5%, and luxury residential property prices to remain stable.

Retail

Hong Kong’s retail sales performance continued to benefit from improved consumption sentiment and a sharp rebound in visitor arrivals. 

Visitor arrivals have been rising significantly since the reopening of the borders. The number of visitor arrivals in April increased to over 2.89 million from just 4,692 a year earlier. About 80% of the visitors were from the Chinese mainland. 

Fuelled by improving market sentiment, the retail leasing market regained momentum in June, particularly in prime retail streets. Some significant leasing cases were recorded in core shopping districts during the month. 

Retail landlords are active in seeking tenants who embrace experiential retail concepts, as customers nowadays are looking for new and unique experiences. 

Looking ahead, we expect to see modest growth of 5% in rents across the board this year due to the decreasing number of vacant shops in prime locations.