Grade-A Office                                                                                                         

Hong Kong Island

As sentiment continued to soften in the Grade-A office market in the current political and economic climate, vacancies in Central (3.4%) and its peripheral districts rose to the highest level in five years as decentralisation picked up speed. However, the leasing market saw an increase in activities, with tenants taking advantage of the weaken sentiments to renew, relocate or downsize.

Market conditions remain uncertain moving into 2020, as a wait-and-see attitude dictates tenants’ market outlook and business plans.

Kowloon

Leasing demand weakened further in December. Most of the transactions recorded during the month were small offices of less than 3,000 sq ft.

Leasing costs are a major concern for sourcing, shipping and logistics companies, as they have been particularly affected by the China-U.S. trade war. Many of them have downsized their offices to as much as half of their original area.

We expect the trend of landlords offering more flexible terms to persist in the coming months, given the current substantial amount of supply. Office rents in Kowloon should continue to soften in the first half of this year and pick up in the second half when most of the supply is absorbed.

Residential

Although property prices were under pressure in the second half of 2019, favourable Government policies, including a higher mortgage ceiling, provided support for transaction volume during the year. The number of primary transactions reached 21,108 units in 2019, a 15-year high. As the new mortgage ceiling has helped homebuyers afford bigger homes, demand for nano units dropped significantly over the past few months.

Despite cautious sentiment related to potential headwinds, many local developers were optimistic about the luxury residential market in the long run.

As several new projects will be launched this year at attractive prices, such as Wetland Seasons Park in Tin Shui Wai and West Park in Cheung Sha Wan, we expect the primary market to rebound after Chinese New Year. As for the leasing market, we foresee landlords to continue to offer flexible terms such as short-term leases or rent free to attract tenants in the upcoming leasing season.

Retail

Hong Kong’s retail market continued to be severely impacted by months of social unrest and subdued economic conditions. Total retail sales value registered a significant drop of 23.6% YoY in November 2019, representing a continuous decline for 10 months, and the second biggest drop on record. We expect this drop to narrow in December 2019 because of the holiday season, but total retail sales value in 2019 is expected to be less than HK$400 billion, the worst since 2010.

The performance of retail sector is likely to slacken further entering 2020. We expect to see some store closures, as brands are forced to streamline the number of outlets because of sluggish sales. We forecast that the prime street shop rents will drop by at least 15% in 2020 to the level in 2010 and 2011, when retail rents hit the last trough.