_The legal and finance sectors lead the office market amid challenges
Knight Frank's latest Hong Kong Monthly Report highlights varied property market performance. In February, Grade-A Office rents on Hong Kong Island declined, though the legal sector grew due to the increasing complexity of financial markets. The Kowloon office market stagnated due to the Lunar New Year, and the overall rent is likely to experience a decline in the coming months as more deals are finalised in lower-rent locations. The residential market shows early recovery signs, with increased first-hand sales and demand for luxury units. Additionally, the retail sector is gaining traction, especially with health and wellness businesses in prime locations.
Grade-A Office:
Hong Kong Island
In February, the overall average Grade A rent in Hong Kong Island continued to decline, dropping by 0.5% MoM and 4.3% YoY. Despite this downward trend in rents and a lack of significant transactions during the month, there has been notable activity in smaller office spaces.
The legal sector is experiencing significant growth due to the increasing complexity of financial markets, resulting in heightened demand for specialised legal services. Meanwhile, the finance sector remained active, with notable transactions involving commercial insurance brokerage services and alternative investment firms.
The government announced in the 2025-2026 Budget that it will not release new commercial sites for sale, allowing the market to absorb existing supply. Additionally, the government is considering rezoning some commercial properties for residential use. These measures are expected to stabilise the office market and mitigate rental pressures.
Kowloon
The Kowloon office market experienced relatively stagnant conditions in February, largely due to the Lunar New Year holidays, which delayed decision-making and led to a significant focus on lease renewals. Despite the decrease in overall transactions, average rents for relocations surged by 10%, with tenants showing increasing interest in prime locations such as Tsim Sha Tsui. However, we are cautious that February's average rent increase likely represents a temporary rebound rather than a sustainable recovery.
The Kowloon office market is expected to stabilise at its current low levels, with the timeline for recovery remaining uncertain amid weak demand across key business sectors. Full recovery will be contingent on geopolitical stability and broader economic conditions. Landlords in Kowloon will likely continue to engage in aggressive competition, offering further incentives and rent discounts to attract tenants, particularly for newer properties facing higher vacancy rates. This competitive landscape creates opportunities for tenants in strong positions, facilitating an increase in early negotiations and lease restructures within the market.
Residential:
The residential market shows early signs of recovery. In early 2025, Hong Kong's residential market continues to grapple with declining home prices. In February, total residential sales transactions fell to 3,200, an 11.7% MoM drop. However, first-hand sales showed a significant uptick, rising by 17% MoM to 900 transactions after two consecutive months of decline. The budget raised the threshold for homes eligible for the HK$100 stamp duty from HK$3 million to HK$4 million. New developments priced below HK$4 million have attracted buyer interest, and we expect residential transactions to increase by 5% to 10%. On the other hand, the luxury residential segment has remained resilient, with strong demand for larger units exceeding 1,000 sq ft.
As the market generally anticipates more interest rate cuts in 2025, and the Hang Seng Index (HIS) has improved, home buyers have become more active, as reflected by the brisk sales in the primary market. This shift in mindset could signal a turning point for the residential market. As confidence grows, we expect home prices to bottom out in the first half of 2025, paving the way for a more robust recovery.
Retail:
Innovative and health sectors have gained momentum despite the challenging environment. As the Lunar New Year arrived in late January, retail sales showed weakness. Provisional retail sales slightly increased to HK$35.3 billion in January 2025, reflecting a 7.6% MoM growth but a 3.2% YoY decline.
While traditional retail sectors continue to struggle, there is a noticeable shift towards innovative and health-focused businesses. Health and wellness-related businesses are beginning to occupy prime locations once held by larger brands and conventional retailers. The recent inauguration of the Kai Tak Sports Park has generated positive feedback from nearby shopping malls and restaurants, noting increased foot traffic and business activity in the Kai Tak area. In light of the sporting events and infrastructure provided by the sports park, more retailers, especially those in health and wellness, are likely to seize the opportunities to expand their presence. Overall, we anticipate an increase in leasing activities in the market driven by “alternative” retailers that cater to specific consumer interests, reflecting the evolving landscape of the retail market.