At a press conference held in Knight Frank Hong Kong office this afternoon, Antonio Wu, Head of Capital Markets, Greater China, Patrick Mak, Managing Director and Head of Office Strategy & Solutions, Greater Bay Area, Wendy Lau, Executive Director and Head of Hong Kong Office Strategy & Solutions, Martin Wong, Director and Head of Research & Consultancy, Greater China, and Helen Mak, Senior Director and Head of Retail Services, presented their forecasts for Hong Kong and Chinese mainland’s property markets for 2023.
Chinese Mainland Residential Market:
Martin Wong, Director and Head of Research & Consultancy, Greater China
In 2022, the performance of the residential market in Chinese mainland has been hampered by the pandemic, economic downside risks, debt problems and the Central Government's measures to regulate the real estate sector. The Central Government has recently started to implement a series of measures to "protect the delivery of properties". These measures include supporting the housing market with Article 16 of the Finance Law and the People's Bank of China’s provision of low-interest loans to financial institutions to purchase new bonds issued by real estate developers.
Real GDP growth in Chinese mainland is expected to rebound to 4-4.5% in 2023, but there is still uncertainty in the residential property market in the next 6-12 months due to the multi-faceted debt problems. Property prices in first-tier cities in Chinese mainland are expected to record a slight increase in 2023, up 0-3% YoY, outperforming other cities, while prices in some second-tier and third-tier cities are expected to record a mild decrease, down 0-2% YoY.
Hong Kong Residential Market:
Martin Wong, Director and Head of Research & Consultancy, Greater China
Given the weak performance of the local stock market, shrinking labour force, rising mortgage rates and the rapid deterioration of the global economic situation, the decline in Hong Kong residential property prices has accelerated significantly in the second half of this year, and will fall by nearly 15% for the whole year. The transaction volume is also expected to hit a new low, with only 45,000 first-hand and second-hand transactions throughout the year.
Unless the government eases property cooling measures, it is unlikely for home prices to rebound in the short term due to the lack of positive news in the market. The competition between first-hand and second-hand markets has intensified owing to the slowdown of the pace of new project launches and stockpiling of unsold flats. The poor performance of the property market has affected the Government's land sales revenue. It is estimated that the land sales revenue in 2022 will only be about HK$35 billion, a significant drop of 68% YoY.
Since the current real interest rate has exceeded 3%, it has begun to have a certain impact on the purchasing power of homeowners. Looking forward to 2023, mass residential property prices in Hong Kong will fall by 5-10%, and luxury residential property prices will fall by 0-5%. We expect the total volume of first-hand and second-hand transactions will edge up slightly to 48,000-53,000, of which first-hand transactions account for 30%.
This year, the pace of the Government’s land sale is slower than expected. We expect the sale of certain sites in the current land sale programme to be delayed until 2023. It is estimated that the revenue from land sales in 2023 will reach HK$50-70 billion, while the annual land premium is expected to reach HK$35-40 billion.
Hong Kong Office Market:
Wendy Lau, Executive Director and Head of Hong Kong Office Strategy & Solutions
The global economy has deteriorated significantly, resulting in poor market sentiment, affecting the overall leasing performance of Grade-A office buildings on Hong Kong Island and dragging down the rents. “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.
By 2025, there will be about 3.5 million sq ft of new office space supply on Hong Kong Island, mainly in Central and Quarry Bay districts. The record-high vacancy rate in Central, coupled with abundant supply in the next couple of years, will put further downward pressure on rents. In the short term, some relatively aggressive landlords will deploy substantial price reductions to attract tenants, and a round of price reduction war can possibly happen. Compared with Central, the rent at Quarry Bay is already at a very low level so a less extent of downward rental adjustment is expected.
Considering the global and local economic situations, the market lacks positive factors to drive market recovery. We expect office demand to remain sluggish in 2023, and the overall rents on Hong Kong Island will fall by 3-5% for the whole year.
Kowloon Office Market:
Patrick Mak, Managing Director and Head of Office Strategy & Solutions, Greater Bay Area
The vacancy rate in Kowloon climbed to 7.5% but a mild decrease was recorded in Kowloon Central. Office demand is resuming with sizeable transactions recorded in the second half of 2022. Electronic and sourcing companies remained a major driver.
Flight-to-quality remained an occupied priority. Apart from quality, office demand is affected by other factors, such as workplace strategy, as a rising number of companies adopt work-from-home, hot desking and agile working. Meanwhile, ESG is becoming a key requirement for modern corporates. Buildings with ESG green features are more appealing to tenants and more likely to stand out from other competitors in the market.
The overall office market in Kowloon saw signs of bottoming out. If the border with Chinese mainland reopens, we expect Chinese mainland and MNC tenants to return and the overall Kowloon office rents to slightly increase by 0 to 3% in 2023.
Capital Markets:
Antonio Wu, Head of Capital Markets, Greater China
The overall investment sentiment in 2022 is weak as the border with Chinese mainland remain closed and entry quarantine restriction is still in place. From January to November 2022, a total of 172 deals were recorded in the local market, equivalent to around HK$54 billion, down 35% YoY. In terms of property types, en-bloc industrial (24%) and development sites (24%) were the most active sectors, followed by en-bloc residential (20%). Hotel assets accounted for 12% of market transactions, with a total of six deals concluded in the first six months of this year. Office transactions continued to slow down, with only a few en-bloc office buildings changing hands.
Low investment yields in Hong Kong, coupled with interest rate hikes, will make real estate funds or institutions difficult to underwrite deals and limit the number of transactions in 2023. In addition, investors will look for higher investment returns to cover the debt. It is believed that there will be more mortgagee sales or assets under receivership, and more distressed offices for sale. As the residential prices and accommodation values drop, it is expected to attract developer interest. We expect more private families or high-net-worth individuals will enter the market in 2023 to look for the best real estate deals.
Hong Kong Retail Market:
Helen Mak, Senior Director, Head of Retail Services
Despite the new round of electronic consumption vouchers issued by the Government, Hong Kong’s retail market remained weak. With the recurrent outbreaks of COVID-19 in Hong Kong, it is unlikely that the Government will further relax the entry quarantine restriction to 0+0 and reopen the border with Chinese mainland. As the number of inbound tourists will not increase significantly at this stage, and local consumption is weakened by the economic downturn and wealth effect, we expect the monthly retail sales value to hover below HK$30 billion in the short term.
Looking ahead to 2023, Hong Kong's retail market has no sign of bottoming up, so we expect overall retail street rents to drop by another 10-15% YoY. Retailers are not optimistic about the market outlook, with only a small number of retailers in the F&B and necessity sectors considering opening new shops. Further rent adjustments will not significantly improve the vacancy rate. If the Chinese mainland border reopens, it will encourage retailers to reopen or expand their retail outlets. Only then the vacancy rate will fall, and the retail landscape will be dominated by experiential consumption.