Knight Frank launches the latest Hong Kong Monthly Report. Under the pressure of record-high vacancy, overall rents on Hong Kong Island dropped further in August. Like Hong Kong Island, most tenants in Kowloon are sitting on the side-lines as leasing activity continued to slow down in August. In August, affected by rising interest rates and an increasing number of new flats in the market, residential home prices remained under pressure. Despite the reopening of the border and the change of quarantine rules to “0+3”, the overall retail market is expected to remain weak.
Grade-A Office
Hong Kong Island
Under the pressure of record-high vacancy, overall rents on Hong Kong Island dropped further in August. Leasing momentum remained soft in August, with many tenants seeking to renew leases in favour of relocation. The limited Grade A office take-up was dominated by co-working operators and government agencies. Co-working operators are actively seeking quality space for operations.
Looking ahead, the continued weak business sentiment is expected to prevail, and we expect landlords to offer more innovative and flexible leasing packages to retain and attract tenants. Although the border restrictions have been relaxed, the market will still require some time to absorb the abundant supply. Therefore, we expect the vacancy rate, especially in the non-core areas, to remain at a high level in the coming quarter, with rents under pressure.
Kowloon
Like Hong Kong Island, most tenants are sitting on the side-lines as leasing activity continued to slow down in August. Transactions in the Kowloon market were supported mainly by small-size deals.
Given the worsening business sentiment and the lack of demand drivers from the Chinese mainland and multinational firms, the leasing market in Kowloon is expected to remain under pressure. We are conservative about short-term market performance but remain optimistic towards the end of the year. We expect the overall growth forecast for the Kowloon office market to be in the range of 0% to 2% in full-year 2022.
Residential
In August, affected by rising interest rates and an increasing number of new flats in the market, residential home prices remained under pressure. Many potential buyers and homeowners were waiting on the side-lines and primary sales supported overall market sentiment.
In the short term, purchase sentiment is expected to remain weak, and home prices are expected to remain under pressure amid concerns about more interest rate hikes, high levels of new completions, and a weakening economy. Nonetheless, with first hand project launches, and various finance schemes offered by developers, much of the purchasing power in the secondary market is expected to shift to the primary market. With the relaxation of the stress test requirement for mortgages by Hong Kong Monterey Authority and the quarantine rules for arrivals, we expect home prices to be less fluctuated in the remaining of 2022.
Retail
Fuelled by improved local consumption sentiment, Hong Kong’s retail sales rebounded in July 2022 after two consecutive months of declines in May and June. For the first seven months of 2022 taken together, the value of total retail sales registered a mild decrease of 1.7% compared with the same period in 2021 but was down 17.7% compared with the pre-pandemic level in 2019.
Despite the reopening of the border and the change of quarantine rules to “0+3”, the overall retail market is expected to remain weak. In our view, the end of the hotel quarantine policy may not bring many visitors, especially short-haul visitors to Hong Kong in the short term. Also, Hong Kong USD linked currency makes the city a less attractive destination for most tourists. Our high value currency may also result in more Hong Kong people leaving for overseas holidays thus damping domestic demand.
Looking ahead, given the growing economic uncertainty, Hong Kong’s retail market will continue to face mounting challenges.