_Chinese mainland restaurateurs saw an increase in activity, driving the retail leasing momentum

Despite the office rental downtrend, the flight-to-quality trend continued. Companies from multiple sectors took advantage of the tenant-favoured environment to consolidate their office space. In the residential market, . the sluggish economy continued to cast a shadow on the residential sales market. However, the residential transaction volume rebounded for the second consecutive month in December. Hong Kong’s retail sales continued to recover steadily on the back of moderate growth in inbound tourism and a revival in consumer sentiment. The retail leasing momentum continues to pick up, along with growing leasing demand from Chinese mainland restaurateurs.

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Hong Kong Island

Given soft market sentiment and limited demand, the overall average rent on Hong Kong Island fell further to HK$64.7 per sq ft in December, marking a 1.4% MoM drop or 6.9% YoY drop. In full-year 2023, Central experienced the largest decline among major submarkets, with the overall average rent decreasing by 10.2%.

Despite the rental downtrend, the flight-to-quality trend continued. Companies from multiple sectors took advantage of the tenant-favoured environment to consolidate their office space.

As office landlords are beset with record-high vacancies and unfavourable supply–demand dynamics, more of them have started slashing their asking rents or offering flexible leasing packages to attract tenants. Going forward, we expect the office vacancy rate to remain high and overall rents on Hong Kong Island fall by 0–3% in 2024.

Kowloon

Office demand continued to be soft due to the festive season. The average monthly rent was about HK$22 per sq ft, and the deals were dominated by offices with an average size of 3,000 sq ft or below. Activity remained lively in Kowloon East, with engineering companies the key demand drivers in December.

Despite the quiet market, there was growing demand from government and infrastructure businesses, supporting leasing market activity during the month.

Looking forward, we expect the Kowloon office-leasing market to gradually gain momentum in Q1 2024. With further improving market demand, a more solid positive effect should hopefully be seen in Q2, and mild rental growth of 1 to 3% is expected in the Kowloon market for the full-year 2024.

Residential

The sluggish economy continued to cast a shadow on the residential sales market. Overall residential prices fell by 2% MoM in November, marking the seventh consecutive monthly drop, and a year-to-date (YTD) decline of 5.6%, according to the Rating and Valuation Department. However, there was a rebound in residential transaction volume for the second consecutive month in December.

Overall rental rates saw a modest growth of 0.6% in November, according to the Rating and Valuation Department. Despite the slowdown in the growth rate, rental levels have increased 6.4% YTD, rising for the 10th consecutive month. Thanks to the continued influx of global talent, there is strong demand for homes in prime districts, specifically those close to universities and renowned international schools.

The luxury residential segment remains resilient. Some notable sales and rental transactions were recorded during the month.

The Government recently announced details of the new Capital Investment Entrant Scheme (CIES). We believe that the new CIES could attract high-net-worth individuals from both overseas and the Chinese mainland, providing a potential catalyst for the luxury residential sector.

Retail

Hong Kong’s retail sales continued to recover steadily on the back of moderate growth in inbound tourism and a revival in consumer sentiment. Total retail sales value in November 2023 increased by 15.9% YoY to $34.2 billion, higher than market expectations of 11.6%, marking the 12th consecutive month of growth. 

Fuelled by the recovering market, the retail leasing market gradually regained momentum in January. Tenants were more confident and willing to commit to large shops in core areas. 

Leasing momentum continues to pick up, along with growing leasing demand from Chinese mainland restaurateurs, who have been actively expanding their footprint in Hong Kong. However, mainland F&B operators are currently seeking high street shops previously occupied by general retail tenants. This shift in demand may exert downward pressure on retail rentals in core areas. 

Looking ahead, local residents traveling to the mainland for consumption will remain a challenge for Hong Kong’s retail market. Additionally, although there has been an improvement in shop occupancy rates in core shopping districts, rental levels have yet to rebound significantly. Rental affordability of shop tenants is not expected to be comparable to that pre-Covid, so any further rent increases will be moderate.

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