_Chinese mainland and Hong Kong property market 2024 forecasts

At a press conference held in Knight Frank Hong Kong office this afternoon, Russell Lam, Executive Director of Capital Markets, Wendy Lau, Executive Director, Head of Hong Kong Office Strategy & Solutions, Steve Ng, Senior Director, Head of Kowloon Office Strategy & Solutions, Martin Wong, Senior Director, Head of Research & Consultancy, Greater China, presented their forecasts for Hong Kong and Chinese mainland’s property markets for 2024. Alnwick Chan, Managing Director, Professional Services, participated in the media Q&A session

Hong Kong Residential Market:

Martin Wong, Senior Director and Head of Research & Consultancy, Greater China

Despite the government removing all property cooling measures at the end of February, the recovery in home prices has remained slow. This is due to the high interest rate environment, insufficient buyer purchasing power, and the abundance of unsold inventory. The total number of unsold residential units reached a record high in 2023, and new private home supply is expected to hit a 20-year high this year. Considering the ample residential supply and interest rates yet to be lowered, we expect home prices to fall by 5% in 2024, while first-hand and second-hand transactions are projected to increase slightly to 48,000-53,000 units, with first-hand sales accounting for 35%.

In contrast, the leasing market remained robust, supported by demand from overseas top talents. We expect mass residential rents to rise by 5-8% and luxury rents to rise by 3-5% in 2024.

Due to market challenges, most residential sites will be rolled over from 2023. We estimate that the government land sale revenue in 2024 will reach HK$10 to 13 billion, while the annual land premiums are expected to reach HK$5 to 8 billion.

Given the unfavorable economic climate and lingering high interest rates, we expect the home prices to move repeatedly downwards in the second half of the year and appear as "obtuse-shaped" over 2024. Until the unsold inventory drops by another 8,000 to 10,000 units, there may not be a rebound in home prices.

Hong Kong Island Office Market:

Wendy Lau, Executive Director and Head of Hong Kong Office Strategy & Solutions

The Hong Kong office sector continues to face challenges and grapple with declining rents and rising vacancies. With limited new demand and weak market sentiment, the overall rents of Hong Kong Island dropped by 2% year-to-date as of May 2024, while the overall vacancy rate reaching a high level of 12.3%. Among all submarkets, the Central district witnessed a significant reduction in rent, with a 3.4% year-to-date decline.

On a positive note, we have seen the return of Chinese mainland companies, with continued inquiries and new demand for small and medium-sized quality office space below 5,000 sq ft. Furthermore, there have been a handful of expansion cases involving foreign financial institutions despite the overall weak performance of the financial sector.

The recentralisation and flight-to-quality trends persisted, as occupiers seized the opportunity from falling rents for office or location upgrades. More tenants focus on new development for relocation, driving landlords of new development to increasingly recognise the importance of providing elevated amenities, such as conference and event spaces, collaborative areas, and gyms to attract tenants.

In the absence of any encouraging catalysts, we expect office lease demand to remain subdued in 2H 2024 given the current conditions of local and worldwide economies. As rent continued to fall in prime districts, we expect the overall Grade-A office rent on Hong Kong Island to fall by 3% to 5% for the whole year.

Kowloon Office Market:

Steve Ng, Senior Director and Head of Kowloon Office Strategy & Solutions

The imbalance between supply and demand has put the Kowloon office market in a challenging position. Despite the new office completion volume dropping significantly in 2024, supply from previous years has carried over. As a result, an abundance of office supply has emerged in Kowloon.

In contrast, there remains a lack of strong demand drivers in the Kowloon office market this year. In H1 2024, total transaction size, average transaction size, and average transaction rents have all declined. Most of the demand is coming from tenants looking to adjust their office sizes or tighten their budgets. The "flight-to-quality" trend continues as occupiers capitalise on the dropping rents for office upgrades.

As a result, landlords are now making adjustments to compete with others, including lowering asking rents, increasing agency fees, and offering more incentives such as fit-out allowances to attract and retain tenants.

Moving forward, we expect Kowloon office demand to remain weak, with market activities likely to be driven by smaller tenants (i.e. less than 10,000 sq. ft.). As the competition among landlords intensifies, overall Kowloon office rents are expected to see a very mild increase of 0 to 2% in 2024.

Hong Kong Capital Markets:

Russell Lam, Executive Director of Capital Markets

With a high-interest rate environment and the accumulation of unsold inventories across sectors, the overall real estate capital market has been slow in the first half of 2024.

From January to May 2024, a total of HK$22.55 billion of transactions (property value of HK$100 million or above) were recorded, representing a 29% decline compared to the previous year. The number of capital market transactions also dropped 27% in the same period, with 71 transactions recorded.

In terms of property types, the residential sector accounted for 51% of market activity and is expected to continue to perform well, driven by demand for first-hand luxury residential and distressed properties. The retail sector followed at 25% as retail pricing adjusted in terms of yield and unit price, with sellers cognizant of the cross-border consumption habits of local residents continuing to put pressure on Hong Kong retail rents. Development sites followed at 10%, comprising only one purchase of a site by compulsory auction sale - Champagne Court in Tsim Sha Tsui. If we exclude that transaction, there have been no development site transactions over $100 million so far this year, as most developers and investors are cautious about adding extra land to their land bank, concerned with the large existing inventories.

Despite the high office vacancy rate, office transactions have been relatively resilient, comprising 9% of the transactions, with HK$3 billion concluded in the first five months of this year, on par with the same period in 2023. The industrial sector has been relatively quiet this year, accounting for only 3% of transactions, with the sale and purchase of large-scale logistics facilities troubled by the decline in sea-freight logistics and local cold storage demand, while the investment demand for modern industrial workshops is also somehow cannibalised by the relaxation of all punitive residential stamp duties, including NRSD, SSD and BSD.

Looking ahead to the second half of 2024, we expect the market to be dominated by end-users and private investors, as most private equity real estate funds and insurance capital still adopt a wait-and-see approach.

Hong Kong Retail Market:

Helen Mak, Senior Director and Head of Retail Services

The retail sector in Hong Kong has faced a sharp decline, with a year-on-year drop of 14.7% in April 2024. The provisional estimate of the total retail sales value in April was HK$29.6 billion. Moreover, for the first four months of 2024, the value of total retail sales is estimated to have decreased by 4.7% compared to the same period in 2023. This latest shortfall in retail sales indicates that Hong Kong is grappling with persistent challenges in consumer confidence, waning competitiveness, and changing tourism spending patterns.

One of the primary reasons for this decline is the shifting spending habits of mainland visitors, who comprise a significant portion of the city's tourist base. These visitors are now more inclined towards in-depth cultural tours rather than traditional shopping activities. In the first four months of 2024, hard-luxury sales slipped 7.8% year-on-year to HKD 18.2 billion, while overall retail sales in all categories fell 4.7% to HK$ 131 billion.

The luxury retail sector, which has historically commanded the highest rents, is now facing the brunt of this downturn. Due to the poor performance of luxury sales, luxury retailers are not expected to expand further. Consequently, overall retail rental is likely to remain low, as there is also no strong demand from general retailers to open more shops without solid retail sales performance to support it.

Retailers have expressed a pessimistic outlook for May and June, even with the anticipated boost from the Labour Day "golden week" holiday on the mainland. Many have reported a "very large" gap between their expectations and actual performance.

Given the prevailing trends, we anticipate a conservative outlook for retail sales performance in 2024, with the possibility of not being able to achieve the same level as 2023. This could further impact the retail momentum in Hong Kong.

Photo description: (From left to right) Martin Wong, Senior Director, Head of Research & Consultancy, Greater China, Wendy Lau, Executive Director, Head of Hong Kong Office Strategy & Solutions, Alnwick Chan, Managing Director, Professional Services, Russell Lam, Executive Director of Capital Markets and Steve Ng, Senior Director, Head of Kowloon Office Strategy & Solutions