Knight Frank launches the latest Hong Kong Monthly Report. The COVID-19 pandemic and local political uncertainty continued to dampen market sentiment and exert heavy pressure on office rentals in the CBD area. Tenant decentralisation from core Kowloon districts to Kowloon East continued to dominate relocation activity in the office leasing market. Despite the worsening economy and political uncertainty, the luxury homes market remained resilient, with purchase sentiment remaining strong. In the retail market, we expect the vacancy rate in core retail areas to continue to surge and prime street rents to continue to seek bottom during the rest of 2020.
Grade-A Office
Hong Kong Island
The COVID-19 pandemic and local political uncertainty continued to dampen market sentiment and exert heavy pressure on office rentals in the CBD area. In June, Grade-A office rentals plummeted 26.5% in Admiralty and 22.6% in Central YoY, extending the decline to 14 consecutive months.
Despite the overall sluggish economic conditions, Chinese companies, particularly the leading players in the financial sector and tech giants, sought expansion against the backdrop of an overall downward trend in rents. Many tenants, especially small companies that are more sensitive to high rent, urged greater flexibility in lease terms, such as shorter leases, amid the current uncertainty.
Looking ahead, with the worsening local economy, heightened political tension, and a third COVID-19 wave in the city, we expect both landlords and tenants to remain conservative.
Kowloon
Tenant decentralisation from core Kowloon districts to Kowloon East continued to dominate relocation activity in the office leasing market, as tenants face mounting pressure to reduce costs by downsizing, resulting in a large number of new lease transactions for small premises of less than 3,000 sq ft.
Rents in Kowloon East continued to drop, slipping 7.8% YoY in June. The trend of dropping rent in Kowloon East is mainly led by individual owners, though closely followed by the traditional landlords. More landlords are also offering non-financial incentives, such as free parking spaces, and waiving the reinstatement fee for new tenants. With the soaring vacancy rate and abundant upcoming supply, we expect traditional landlords to lower rents more aggressively, therefore lead to a further downward adjustment in the second half of the year.
Residential
The adverse impact of the COVID-19 pandemic continued to linger in Hong Kong, with the labour market showing further deterioration. The latest unemployment rate for the March to May period climbed to the highest level in 15 years, hitting 6.2%. Despite this, the primary residential market received a warm response in June, which shows that deferred demand returned to the market when Hong Kong’s COVID-19 situation eased previously. Momentum in the secondary market also persisted, similar to the level in the previous month.
Despite the worsening economy and political uncertainty, the luxury market remained resilient, with purchase sentiment remaining strong.
In the leasing market, we saw a revival of leasing activity for luxury properties, with demand coming mainly from local prospective tenants. There was more flat-viewing activity in areas close to international schools to prepare for the coming academic year. Several properties that had been listed for rental for a long time were leased out during the month, and the number of units available for lease in the market fell, again reflecting buoyant local demand.
With Hong Kong experiencing the third wave of COVID-19, buyer sentiment is expected to weaken in the coming weeks, especially in the secondary market.
In the leasing market, we saw a revival of leasing activity for luxury properties, with demand coming mainly from local prospective tenants. There was more flat-viewing activity in areas close to international schools to prepare for the coming academic year. Several properties that had been listed for rental for a long time were leased out during the month, and the number of units available for lease in the market fell, again reflecting buoyant local demand.
With Hong Kong experiencing the third wave of COVID-19, buyer sentiment is expected to weaken in the coming weeks, especially in the secondary market.
Retail
Hong Kong’s retail market continued to suffer, with visible shrinkage in retail sales and a spate of store closures, as the protracted pandemic hit inbound tourism hard. Given the travel restrictions, visitor arrivals plummeted 99.9% YoY to only about 8,000 in May. In the first five months of 2020, retail sales value declined by 34.8% YoY.
As the retail market continued to be devastated by the evaporation of tourist receipts and weak local consumption, a number of international brands closed their flagship stores in core retail areas.
With the COVID-19 pandemic continuing to weigh heavily on the retail property market, prime retail districts have seen alarming signs of an abundance of vacant shops. Given the current weakening demand in the market, especially for large shops, landlords are dividing some into smaller shops to make it easier to rent vacant space. Some landlords of Ginza-style buildings have considered converting part of the vacant floors from food and beverage use to offices.
We also expect the vacancy rate in core retail areas to continue to surge and prime street rents to continue to seek bottom during the rest of 2020, following a 30% downward adjustment in the first half of the year.