Knight Frank launches the latest Hong Kong Monthly Report. The Hong Kong Island office market continued to be hit by volatile market conditions, with an accelerating rental decline. Kowloon office market rents remained stable, which further supported our observation of a bottoming-out trend. The Hong Kong residential market remained sluggish and lost momentum, resulting in a significant decrease in transaction volume. The retail market was sluggish in 2022, as local consumers remained conversative conservative in spending, and the Consumption Voucher Scheme provided only short-term support for the economy.

Grade-A Office

Hong Kong Island

The Hong Kong Island office market continued to be hit by volatile market conditions, with an accelerating rental decline. As cautious sentiment prevailed, leasing activity remained at a low level in November. Certain upgrading cases were recorded.

Looking forward, 3.5 million sq ft of new office supply will enter the Hong Kong Island market by 2025, mainly in Central and Quarry Bay. Coupled with the existing high vacancy rate, rents are expected to face further pressure and continue their downward trajectory. We expect office demand to remain sluggish in 2023 and overall rents of Hong Kong Island to fall by 3% to 5% for the whole year.

Kowloon

In November, Kowloon office market rents remained stable, which further supported our observation of a bottoming-out trend. Electronics and sourcing companies remained a major demand driver.

Several sizable transactions supported market sentiment, as occupiers were keen to finalize their real estate decisions towards the end of the year. Apart from office quality upgrades, the continued rise of ESG and agile workplaces have become considerations in occupiers’ real estate decisions.

In the short term, we expect the Kowloon market to remain weak, but see signs of it bottoming out. With the imminent border reopening with the Chinese mainland and the removal of most travel restrictions in Hong Kong, mainland and MNC tenants are expected to return, and Kowloon rents should increase slightly by 0% to 3% in 2023.

Residential

The Hong Kong residential market remained sluggish and lost momentum, as rising interest rates and the weakening local economy continued to weigh on buying sentiment, resulting in a significant decrease in transaction volume.

Amid the shrinking labour force, rising mortgage rates and the deteriorating external environment, overall residential home prices continued to slump.

In the mass market, there was a rising number of loss-making housing transactions amid the emigration wave. Some homeowners were in a rush to sell their properties and were willing to substantially reduce their asking prices. The luxury market performed better since homeowners were willing to provide wider room for negotiation to potential buyers.

Since the current actual interest rate exceeds 3%, it has begun to have a certain impact on the purchasing power of homeowners. We expect market activity to pick up only after Chinese New Year.

Retail

The latest Hong Kong retail figures indicate that the local retail market has seen a gradual recovery, given the disbursement of a new batch of consumption vouchers and the traditional peak season for the retail market as the Christmas and New Year holidays approach.

Overall, the retail market was sluggish in 2022, as local consumers remained conservative in spending, and the Consumption Voucher Scheme provided only short-term support for the economy.

Looking ahead, the Christmas and New Year holiday period is a typical peak season for the retail market. Since the social-distancing rules are more relaxed than those last year, with people no longer required to scan the LeaveHomeSafe QR code when entering venues, bars, nightclubs, banquets and local tours are no longer required rapid Covid tests, cinemas, theme parks and performing venues can operate at full capacity, and restrictions lifted on arrivals, etc., we believe retail sales are set to pick up. In 2023, we expect to see a stable recovery trend in the retail market, but not a significant rebound. Overall retail rents will remain under pressure owing to the longstanding vacancy rates across the board.