Knight Frank launches the latest Hong Kong Monthly Report. Given the weak market sentiment, overall rents on Hong Kong Island fell further. Leasing activity in Kowloon moderated amid weakening market sentiment. In the residential market, market sentiment was sluggish amid the continued rising interest rates, worsening local economy, and fluctuating stock market. On a positive note, the luxury market was relatively stable. Hong Kong’s retail market remained downbeat and vulnerable. We expect the recovery in the retail market to pre-pandemic levels to take considerable time.
Grade-A Office
Hong Kong Island
Given the weak market sentiment, overall rents on Hong Kong Island fell further. Flight-to-quality remained an occupier priority and drove leasing demand. Occupiers continued looking for office quality upgrades at lower rents, especially in prime locations.
Overall, we expect demand to remain subdued in the short term, given the lack of positive catalysts for recovery. In addition, the record-high existing vacancies and abundant upcoming supply in Central will continue to encourage office landlords to lower rental expectations and offer flexibility to retain and attract tenants. We expect the downward rental trend to continue for the rest of 2022.
Kowloon
Leasing activity in October moderated amid weakening market sentiment. As in September, most leasing transactions were under 3,000 sq ft with rents of HK$22 per sq ft or below. Electronics and sourcing companies remained a major demand driver over the month. Renewal cases supported the leasing market in October with a narrowing of rental declines.
In light of the unlikely further easing of border restriction policies before the end of the year, the recovery of Kowloon office market is expected to be delayed because of the lack of demand from both Chinese mainland and MNC tenants. We expect positive rental growth in 2023, factoring in the return of Chinese mainland and MNC tenants.
Residential
Residential market sentiment was sluggish amid the continued rising interest rates, worsening local economy, and fluctuating stock market. Potential buyers were hesitant to enter the property market, leading to poor performance in both transaction volume and prices.
Overall residential home prices decreased 2.1% MoM in September, according to the Rating and Valuation Department, reaching the lowest level since January 2019. More units were sold below market value in the mass market, given the uncertain market conditions. Developers also reduced the asking prices of new projects to attract buyers.
On the leasing front, local moves remained the core driver. The overall home rental index in September rose for the fifth straight month. Some tenants took the opportunity in the downward market to upgrade their apartments for the same amount, while some homeowners were willing to offer discounts to tenants.
We forecast a 10% drop in home prices for the mass residential market and flat performance for luxury home prices for full-year 2022.
Retail
Hong Kong’s retail market remained downbeat and vulnerable. Total retail sales in September 2022 inched up by 0.2% YoY to $28.1 billion, according to the Census and Statistics Department.
As sentiment remained weak, retail rents in core districts like Tsim Sha Tsui and Causeway Bay continued to tumble. Numerous expired leases were not renewed, and street shops changed hands at ample losses.
We expect the recovery in the retail market to pre-pandemic levels to take considerable time. In the absence of Mainland Chinese visitors and foreign tourists, retailers have to rely on local consumption for the time being.
Looking ahead to 2023, we do not expect significant growth in the local consumption segment, but considering the gradual easing of border restrictions, we expect a rebound in retail sales with returning activity. The retail market will not regain momentum significantly until Hong Kong and the Chinese mainland fully reopen the border.