Knight Frank launches the latest Hong Kong Monthly Report. Amid the current market downturn and mounting uncertainty, the office landlords are expected to be even more flexible in lease negotiations and to offer larger rent reductions. As the decentralisation trend in Kowloon gains steam, the extent of the adjustment will continue to vary significantly by district. As Hong Kong is still facing a third wave of COVID-19 infections, the residential sales market is expected to remain quiet in August. Although the rising unemployment rate will curb purchase sentiment in the short term, the prolonged low interest rate environment will still be a favourable factor. In the retail market, as consumption sentiment remains weak, the retail market is unlikely to hop on the trajectory of recovery for the rest 2020, and the overall vacancy rate is expected to climb to above 11% by the end of 2020.
Grade-A Office
Hong Kong Island
With the coronavirus transmission rate started increasing again in July, working from home has become more widely adopted. As some businesses have scaled back through staff cuts, more and more companies are reconsidering their workplace strategy – in particular, shrinking their office footprint and raising the desk-sharing ratio, instead of the conventional office setting of one-person workstations, thereby reducing overhead.
Amid the current market downturn and mounting uncertainty, we expect landlords to be even more flexible in lease negotiations and to offer larger rent reductions. In view of this, we adjusted our full-year forecast for the overall Hong Kong Island office rental market further downward from 10-12% to 15-18%.
Kowloon
July leasing activity in Kowloon continued to be low. Most of the deals were dominated by renewal leases of small- to mid-size units of less than 5,000 sq ft. As companies have sought bargain deals in the recent down market, several entire-floor new letting cases were recorded in buildings with major rent adjustments.
As the decentralisation trend gains steam, it is noteworthy that the vacancy rate in Tsim Sha Tsui soared from 2.9% to 7.5% within a year, reaching a 15-year high. While in non-core districts such as Kowloon East, the vacancy rate remained at a double-digit rate.
Rents in the Kowloon office market are expected to continue to drop, but given the decentralisation trend, the extent of the adjustment will continue to vary significantly by district.
Residential
The resurgence in the number of COVID-19 cases in Hong Kong has put heavy pressure on the local residential market. Given stricter social-distance restrictions imposed by the government, transaction volume dropped by 12% MoM to 6,133 cases in July.
As the COVID-19 situation drastically worsened in July, purchase sentiment in the luxury market cooled instantly. We saw a significant drop in the number of enquiries and requests for viewing from prospective buyers. However, there were not many new property listings since the holding power of homeowners remained strong. This indicates that many homeowners are still optimistic about the mid- to long-term outlook for the luxury market.
As Hong Kong is still facing a third wave of COVID-19 infections, the residential sales market is expected to remain quiet in August. Although the rising unemployment rate will curb purchase sentiment in the short term, the prolonged low interest rate environment will still be a favourable factor. We expect prices of both mass and luxury residential properties to drop by about 5% in full-year 2020.
Retail
Hong Kong’s retail market continued to struggle in a difficult season, as the number of infection cases has spiked since mid-July.
With the retail sector facing a turbulent time since the middle of last year, Queen’s Road Central, one of the prime shopping streets in the city, has witnessed an all-time high vacancy rate. Our research shows 14 vacant shops on the street, an unprecedented situation in this prestigious area.
With more luxury brands shutting down stores, Queen’s Road Central has witnessed a reshuffling of the tenant mix, shifting towards more mass and affordable brands.
Given the third wave of COVID-19 infections and the ban on dine-in services after 6 pm, the F&B sector will continue to suffer the hardest hit, and restaurant receipts are expected to further contract in Q3. In our view, as consumption sentiment remains weak, the retail market is unlikely to hop on the trajectory of recovery for the rest 2020, and the overall vacancy rate is expected to climb to above 11% by the end of 2020.