_Retail markets navigate cautiously amid global economic shifts

Knight Frank's latest Hong Kong Monthly Report highlights varied property market performance. In March, office rents on Hong Kong Island continued to decline for the third consecutive month, with traditional Grade A offices in Central experiencing a more pronounced drop; the Kowloon office market showed positive activity, contrasting with the quiet market environment in the first two months of 2025; Hong Kong's residential property market saw a significant uptick in transaction volume following the government’s announcement to reduce the stamp duty on the sale of flats worth up to HK$4 million; and Hong Kong’s retail market continues to face significant challenges, with a continued decline in retail sales partly influenced by the early arrival of Lunar New Year.

Grade-A Office:

Hong Kong Island

Office rents on Hong Kong Island have continued to decline, marking the third consecutive month of falling rents. Traditional Grade A offices in Central have experienced a more pronounced drop. As a result, more tenants are seeking higher-quality office leasing options.  

Office market leasing demand in March was largely driven by insurance companies, law firms and hedge funds. Despite the heightened economic uncertainty amid the US tariff policy, the Hong Kong office leasing market has not yet shown immediate impacts.

Looking ahead, more major developments set to enter the market. Other offices will continue to face challenges in balancing overall occupancy and rents, as tenants are presented with more options. We expect office rents to remain under pressure in 2025.

Kowloon

The Kowloon office market showed positive activity in March, contrasting with the quiet market environment in the first two months of 2025. Following two subdued months leading up to the fiscal year-end in March, companies expedited their decision-making, resulting in an increase in transaction volume. The dominant sources driving leasing activity remain electronics and IT-related companies.

Amid the uncertainty of tariff implementation, the market has observed two distinct responses. Large corporations are securing longer lease terms, while some companies favour short-term renewals.

In conclusion, leasing activity in the Kowloon office market during Q1 2025 indicated that flexibility and cost remained the primary concerns for tenants. The adverse effects of tariffs on the sourcing, trading, and retail industries are expected to become more pronounced in the second quarter. We expect Grade A office rents in Kowloon to remain under pressure in the short term due to the negative market outlook and uncertainty surrounding tariffs.

Residential:

Hong Kong's residential property market has shown a significant uptick in transaction volume following the government’s announcement to reduce the stamp duty on the sale of flats worth up to HK$4 million in the Budget. Bolstered by the reduced stamp duty, the first-hand market recorded brisk sales in March.

The luxury property market activity in March was driven by a significant number of distressed units, providing bottom-fishing opportunities for cash-rich buyers.

The leasing market continued to outperform the sales market, with the rental index for February rising 0.3% MoM, marking its third consecutive months increase and reaching a five-year high. Heightened global economic uncertainty has also prompted more buyers to delay flat purchases and turn to the leasing market.

Looking ahead, the escalating US tariff policy is negatively impacting homebuyer sentiment in Hong Kong. Amid macroeconomic uncertainties and currency depreciation risks, buyers are likely to be more cautious, potentially delaying purchases. The erratic stock market has also dampened investment confidence. Consequently, both investors and end-users are expected to adopt a wait-and-see approach amid high uncertainty. We expect the overall home prices to drop by 2-3% in the first half of 2025.

Retail:

Hong Kong’s retail market continues to face significant challenges, with a continued decline in retail sales partly influenced by the early arrival of Lunar New Year.

Recently, the movement of Chinese e-commerce giants like JD.com and Alibaba have been reshaping Hong Kong's retail landscape. JD.com is set to launch a JD Mall focused on home appliances, while Alibaba has opened its first store in Tsim Sha Tsui. These developments expand consumer choices but also pose challenges for local retailers.

The Hong Kong Super March events boosted visitor arrivals in Hong Kong. March saw over 3.4 million visitors, a 12% YoY increase, including 960,000 overseas tourists. Hotel occupancy rates in prime districts approached 90%.

Leasing activity in prime retail streets has gained momentum, but overall rents continue to face downward pressure due to declining retail sales.

Looking ahead, Hong Kong's retail market is expected to see a slowdown in activity as retailers respond cautiously to global economic uncertainties and local stagnant economic growth. More landlords are reducing rents to retain tenants, even for renewals, which may lead to further declines in retail rents and dampen commercial real estate investment.