_Chinese mainland and Hong Kong property market 2024 forecasts
At a press conference held in Knight Frank Hong Kong office this afternoon, Alnwick Chan, Managing Director, Professional Services, Antonio Wu, Head of Capital Markets, Greater China, Wendy Lau, Executive Director, Head of Hong Kong Office Strategy & Solutions, Steve Ng, Senior Director, Head of Kowloon Office Strategy & Solutions, Helen Mak, Senior Director, Head of Retail Services, Martin Wong, Director, Head of Research & Consultancy, Greater China, Robin Huang, Director, Greater Bay Area Office Strategy & Solutions, Nathan Chan, Director, Head of Industrial Services presented their forecasts for Hong Kong and Chinese mainland’s property markets for 2024.
Hong Kong Compulsory Sales:
Alnwick Chan, Managing Director, Professional Services
In recent years, land supply from the government has been limited, especially for developable land in urban areas. The progress of urban renewal is far from satisfactory as it is held back by land lease conditions and fragmented ownership. We recommend that the government should lower the threshold for compulsory sales further to release more land resources and speed up urban renewal. The government should prioritise the redevelopment of older buildings. In addition to considering further lowering the threshold for private properties aged between 50 and 70, the government can also consider broadly lower the threshold for industrial buildings in non-industrial areas. This will provide owners with more incentives to apply for redevelopment and at the same time encourage more investors to participate in urban renewal.
Hong Kong Residential Market:
Martin Wong, Director and Head of Research & Consultancy, Greater China
Given the existing high interest rate environment, insufficient purchasing power, and a high level of unsold inventory in completed projects, the Hong Kong residential market has remained subdued. Residential prices, beset with headwinds, have slackened for the sixth consecutive month. We expect residential property prices to fall by 5% in 2023 and the number of first-hand and second-hand transactions to drop to about 43,000 units, reaching the lowest level since 1997. Under the bleak economic conditions and uncertain future interest rate adjustments, we believe that the relaxation of the cooling measures is unlikely to reverse the downward trend in home prices in the short term.
Looking ahead to 2024, we expect residential property prices in Hong Kong to follow an “L-shaped” trend, declining in the first half of the year and remaining flat in the second half. Mass residential property prices are set to drop by 0% to 5% and luxury residential property prices will remain stable. It is expected that the total volume of first-hand and second-hand transactions will rebound slightly to 48,000-53,000 units, with first-hand transactions accounting for approximately 30% of the total.
The leasing market, in contrast, remained robust, as supported by the growing demand from an increased number of overseas talent attracted to Hong Kong through the Top Talent Pass Scheme. We expect mass residential rents to go up by 5% to 8% in 2024, while that of luxury residential will go up by 3% to 5%.
We estimate that the government land sale revenue in 2024 will reach HK$20-25 billion, while the annual land premiums are expected to reach HK$15-20 billion.
Hong Kong Industrial Market:
Nathan Chan, Director and Head of Industrial Services
In 2023, the industrial leasing market remains resilient, driven by sizable deals from the logistics and car repairing sectors. Both general industrial buildings and modern logistics spaces have continued to record rental growth. Average monthly rents for general industrial buildings in Q3 2023 increased by 11% YoY to HK$12.9 per sq ft; while average monthly rents for modern logistics reached HK$17.4 per sq ft with a 5.5% YoY increase.
In 2023, there has been a surge in demand for art among affluent collectors, museums, and galleries since border reopening. This has led to a significant increase in demand for professional art logistics services and fine arts storage. These tenants typically prefer modern logistics buildings that offer large floor plates, direct ramp access, and higher levels of security.
In addition, leasing demand from the electric vehicle sector continues to grow. Ground floor workshops in locations such as Kwai Chung, Tsuen Wan, and Sha Tin are highly sought after by car repairers.
Hong Kong's merchandise exports remained weak in 2023 due to the ongoing US-China trade war. We expect the weak external demand for goods will continue to impede Hong Kong's export performance in the near future. As a result, we expect industrial rents to come under pressure and vacancy rates to increase in 2024.
Hong Kong Island Office Market:
Wendy Lau, Executive Director and Head of Hong Kong Office Strategy & Solutions
As many of the headwinds impacting Hong Kong’s property market in 2023 will continue into 2024, we remain bearish about the outlook for Hong Kong Island’s office market. New demand will be limited amid weak market sentiment.
The high vacancy rate continues to affect the office leasing market on Hong Kong Island, and rents keep falling. Given the significant amount of new supply in 2024, particularly in the CBD with approximately 1.2 million sq ft of new floorspace, we expect the vacancy in Central to further elevate to an unprecedented high level.
“Flight-to-quality” trend will continue, as occupiers capitalise on falling rents for office or location upgrades. However, given the global and local economic conditions, as well as the absence of positive news from Chinese mainland, office leasing demand is expected to remain subdued in 2024 in the absence of stimulus. We expect office demand to remain soft in 2024, and the overall rent on Hong Kong Island will fall by up to 3% for the whole year.
Kowloon Office Market:
Steve Ng, Senior Director and Head of Kowloon Office Strategy & Solutions
The Kowloon office market has shown signs of gradual improvement this year. New leasing cases of over 10,000 sq ft have recorded a 38% increase in volume compared to the Covid-19 period, approaching pre-pandemic levels. Several factors contribute to this bottoming out: expansion of government and infrastructure-related organisations, opportunities arising from the Greater Bay Area development, tenants' “flight-to-quality” trend, and a continued focus on cost optimisation.
However, this demand is currently only able to support a bottoming out and has not yet led to a rebound. The presence of 7 million sq ft of vacant first-hand and second-hand office space in the Kowloon market continues to put pressure on landlords. In the face of competition, landlords are offering incentives such as fit-out subsidies, rent and management fee discounts, and flexible lease terms to stimulate market activity and attract tenants.
Looking ahead to 2024, the Kowloon office market anticipates a gradual improvement in sentiment, with overall rents expected to see a slight increase of 0-2%.
Greater Bay Area Office Market:
Robin Huang, Director of Greater Bay Area Office Strategy & Solutions
With the reopening of borders between Hong Kong and Chinese mainland earlier this year, the market originally expected a rapid economic recovery in the Greater Bay Area (GBA). However, major office markets such as Shenzhen and Guangzhou continue to be affected by oversupply, leading to a slower-than-expected recovery.
Overall, Hong Kong companies have been particularly active in Shenzhen and its surrounding areas, with Qianhai emerging as a focal point for chipset, semiconductor, and high-tech companies. Meanwhile, Guangzhou remains a key market, especially in Zhujiang New Town and Pazhou areas which have attracted cross-border e-commerce and life science firms. Nevertheless, the imbalance between supply and demand is putting pressure on rents. Office rents in Shenzhen and Guangzhou are expected to decline by 2-5% in 2024.
Regarding the demand from Mainland companies entering Hong Kong, the trend has been stabilising in 2023. While a full rebound is not yet evident and cautious sentiment still prevails, there is a continuous demand for small and medium-sized office leases, particularly in the vicinity of the high-speed rail station in Kowloon. It is anticipated that Mainland companies will continue to explore opportunities in Hong Kong in 2024, further integrating the office market in the GBA.
Hong Kong Capital Markets:
Antonio Wu, Head of Capital Markets, Greater China
With the rising cost of financing and limited yield expansion, the overall real estate capital market has been subdued in 2023 with a year-on-year drop in total transaction amount. From January to December 2023, a total of HK$42.2 billion of transactions were recorded, representing a 35% decline compared to the previous year. In terms of property types, the office sector accounted for 32% of market activity and is expected to continue dominating the market, driven by demand from end-users. Development sites followed at 24%. The hotel & service apartment and retail sectors each accounted for 15% of the market. Industrial investment experienced a pullback, comprising only 7% of the market, while strata industrial/godown assets remained popular among end-users, with demand driven by conversions to mini-storage facilities.
Looking ahead to 2024, the market spotlight is expected to be on distress sales as private equity real estate players actively seek to divest non-core assets to facilitate financing. Although private families, high-net-worth individuals, occupiers, and state-owned enterprises are less sensitive to borrowing, they will still require a significant "peak-to-trough" discount to make purchases. Property values are projected to continue declining in 2024, while first-hand sales volume remains low and there is an accumulation of unsold inventory. We expect that the end-user market will become increasingly active in 2024, as the property market is expected to reach its bottom next year.
Hong Kong Retail Market:
Helen Mak, Senior Director and Head of Retail Services
The Hong Kong retail market is currently facing structural changes and has not fully recovered to pre-pandemic levels. As of October, the total retail sales in Hong Kong amounted to HKD 336 billion, still considerably lower than pre-pandemic levels. Particularly, general clothing, footwear, handbags, and luxury goods consumption have not seen significant growth. Furthermore, the food and beverage industry's revenue has been less than ideal, with HKD 27.6 billion in the first quarter, HKD 27.4 billion in the second quarter, and HKD 27.1 billion in the third quarter. Therefore, retail tenants approach the overall performance for the year with caution.
The underperformance of the Hong Kong retail market can be attributed to several factors. Firstly, the poor performance of the financial services industry has had a ripple effect on other sectors, directly impacting the income of citizens and subsequently affecting retail consumption. Secondly, there has been a decrease in spending from mainland Chinese tourists, with fewer visitors prioritising shopping as their main purpose. Additionally, Hong Kong residents have been choosing to shop in Shenzhen, which has negatively affected the local retail industry. Despite these challenges, it is expected that retail sales will reach approximately HKD 413 billion this year, driven by an increase in mainland visitors and upcoming holidays.
Looking ahead to 2024, due to the continued impact of the aforementioned factors, it is projected that retail sales will only experience marginal growth, reaching around HKD 420 billion. Therefore, it is expected that the retail rental levels in Hong Kong will remain stable, but attention needs to be given to the impact of inflation, which may result in increased overall operating costs for tenants and potential downward pressure on net rents.
To adapt to the changing retail landscape, it is recommended to provide flexible leasing structures and establish strong collaboration between landlords and tenants. For example, promoting pop-up stores and revenue-sharing models can help create more flexible and resilient leasing arrangements to cope with evolving retail trends.
(From left to right): Nathan Chan, Director, Head of Industrial Services, Wendy Lau, Executive Director, Head of Hong Kong Office Strategy & Solutions, Helen Mak, Senior Director, Head of Retail Services, Robin Huang, Director, Greater Bay Area Office Strategy & Solutions, Alnwick Chan, Managing Director, Professional Services, Martin Wong, Director, Head of Research & Consultancy, Greater China, Steve Ng, Senior Director, Head of Kowloon Office Strategy & Solutions and Antonio Wu, Head of Capital Markets, Greater China