Knight Frank launches the latest Hong Kong Monthly Report. In Hong Kong Island, office market’s high vacancy will continue to be further impacted by abundant new supply and negative absorption. The Kowloon office leasing market was aligned with the Hong Kong Island market in July, with a slowdown in tenant movement. In the residential market, supported by the low starting prices of new projects offered by developers, purchase momentum in the primary market persisted. Hong Kong’s retail market remained vulnerable amid the absence of inbound tourism.

Grade-A Office

Hong Kong Island

Affected by the weaker-than-expected economic performance in the second quarter, business sentiment was dampened. Most tenants delayed their real estate decision making, resulting in a significant drop in leasing activity. Given the slow absorption of office space on Hong Kong Island, the overall vacancy rate in July surged to 9.2%, reaching a new height not seen since the SARS outbreak in 2003.

Before the border restrictions are fully relaxed, we expect landlords of existing Grade A buildings to be more flexible and willing to further reduce rents in reaction to growing competition. We forecast that Hong Kong Island office rents will fall 3-5% from their current level in July to year-end.

Kowloon

The Kowloon office leasing market was aligned with the Hong Kong Island market in July, with a slowdown in tenant movement. New leasing demand focused on smaller transactions of 4,500 sq ft or below.

Looking ahead, the Kowloon market will continue to behave similar to the Hong Kong Island market. Tenants will continue to pursue unique market opportunities to drive leasing movement with a flight to quality. The size optimisation trend, driven by the adoption of agile working and WFH will add support for this trend. A gradual rebound in leasing activity in Kowloon is expected by the end of the year.

Residential

Residential sales activity slowed down, and home prices posted a significant drop in July, as they were weighed down by rising interest rates and downbeat market sentiment. According to the Land Registry, a total of 3,671 residential sales were recorded in July, down 23.9% MoM.

Supported by the low starting prices of new projects offered by developers, purchase momentum in the primary market persisted.

As at the end of July, a total of 41 residential projects with 20,222 units had been pending presale approval. Even though the figure dropped to a seven-month low, primary projects are expected to continue to draw market attention in the coming months. Developers may speed up new project launches before any further increases in local interest rates.

Looking ahead, home prices are likely to come under more pressure, as the headwinds of rising interest rates take a firmer hold. While primary residential prices should remain firm, secondary mass residential prices are forecast to experience a gradual downward adjustment of 3% to 5% in full-year 2022.

Retail

Hong Kong’s retail market remained vulnerable amid the absence of inbound tourism. In the first half of 2022, total retail sales value fell by 2.6% YoY, registering over a 30% decline compared to the same period in 2018 (pre-pandemic), reflecting a continuing significant performance gap between the current and the pre-pandemic retail market. The weakening sentiment in Hong Kong’s retail market has prompted landlords to subdivide sizeable premises and offer deeper cuts in shop rents.

We expect downward pressure on retail rents to remain for a while, as the poor economic outlook, more aggressive interest rate hike cycle and volatile stock market are expected to dampen local consumption sentiment and exert considerable pressure on the retail market down the road. However, the number of leasing transactions should increase in the coming months as the shorter of "3+4" quarantine arrangement could be a positive news to lift inbound tourism.