Knight Frank launches the latest Hong Kong Monthly Report. As the COVID-19 pandemic showed signs of abating in September, potential tenants became more active in on-site inspections, resulting in growth in the number of transactions in Grade-A Office market. However, some sizeable financial institutions, who are heavily impacted by the coronavirus recession started to give up office space. In the residential market, purchase sentiment has improved. The primary market, in particular, was under the spotlight with brisk sales recorded in some new projects. In the retail market, supermarkets and shops selling necessities that previously could afford rents only in neighbourhood or community malls are now showing their presence in prime street locations, given the significant downward rental corrections.
Grade-A Office
Hong Kong Island
As the COVID-19 pandemic showed signs of abating in September, potential tenants became more active in on-site inspections, resulting in growth in the number of transactions. Most of the new letting cases during the month were small to mid-sized premises of less than 3,000 sq ft in affordable Grade-A buildings at a relatively attractive rental level.
However, leasing activity and demand for premium Grade-A office buildings remained weak. Some sizeable financial institutions, who are heavily impacted by the coronavirus recession started to give their office space.
Kowloon
Like Hong Kong Island, Kowloon witnessed a surge in the number of inspections, as the number of local COVID-19 infections fell. Most of the new lettings recorded during the month were small units of around 3,000 sq ft in Kowloon East and West at below HK$25 per sq ft.
Despite the rebound of inspection activity, tenants in a cost-conscious environment favour a lease renewal over relocation. Landlords are aware of this prevailing trend. As a result, they continue to compete by offering more flexible incentives to tenants, such as offering rent free period for renewal cases, which was not common before COVID-19.
Residential
With the COVID-19 outbreak easing and some of the social-distancing restrictions lifted, purchase sentiment in the residential market improved. The sales market became more active in September, with transaction volume increasing by 15% MoM to 5,024 units. The primary market, in particular, was under the spotlight, given a number of new project launches.
However, the economic recession and mounting market uncertainty continued to weigh on housing prices. According to the latest official statistics, overall residential prices dropped by 1.1% MoM in August. This was the largest decline since February, resulting in a price gain of only 0.4% so far this year. In the luxury market, some homebuyers successfully leveraged the price correction amid a more volatile market to get on the property ladder, most targeting apartments priced at HK$20–30 million.
The leasing market regained momentum during the month. Flats that were put on the market were leased out quickly since landlords were willing to negotiate. There were more enquiries from expatriates who plan to come to Hong Kong early next year.
Looking ahead, the primary sales market is expected to remain active with a few new projects scheduled for launch in the fourth quarter. Developers may provide more incentives and discounts to speed up sales before the year end. With more units available for sale and protracted negative market factors, we expect housing prices to drop by 3–5% in the rest of 2020.
Retail
Hong Kong’s retail market remained weak amid the economic recession, absence of inbound tourism, and continuing social-distancing restrictions. According to the latest official statistics, retail sales value dropped by 13.1% YoY to HK$25.6 billion in August. The drop narrowed compared to previous months because of the low base effect.
Without inbound tourists, local consumption has become the sole constituent of retail sales. Sales of categories such as groceries and fresh food have been relatively more resilient.
Prime shopping streets such as Queens Road Central and Russell Street have seen the most significant reshuffling of tenant mix in recent history, with more mid-priced brands entering the streets, and luxury brands exiting. Supermarkets and shops selling necessities that previously could afford rents only in neighbourhood or community malls are now showing their presence in prime street locations, given the significant downward rental corrections.
With vacancy rates in prime streets still hovering at the 20–25% level, prime street rents are expected to continue to face heavy downward pressure for the rest of 2020.