Knight Frank launches the latest Hong Kong Monthly Report. Overall office rents on Hong Kong Island stayed flat in December. Overall office rent trend in Kowloon was similar to that on Hong Kong Island, but transaction volume dropped by 40% MoM in December. In the residential market, rising interest rates and the weak domestic economic outlook have prompted more people to delay buying decisions. Fuelled by the recovering market, the retail leasing market gradually regained momentum in January.
Grade-A Office
Hong Kong Island
Overall rents on Hong Kong Island stayed flat at HK$69.5 per sq ft in December. In 2022, Hong Kong Island rents dropped by 8.2% YoY.
Since the border reopening with the Chinese mainland, we have observed an increasing demand for small and medium-sized office space, which could be beneficial for co-working operators. Most of the enquiries have come from Chinese mainland companies. Apart from financial incentives, non-financial incentives are increasingly crucial for landlords to attract or retain tenants by meeting their requirements (i.e. ESG, fit-out, etc.)
Occupier demand from multinational firms, especially in the banking and finance sector, remains weak. New workplace strategies are resulting in the scaling back of office space. A number of firms have sublet or surrendered their surplus space as a result of post-COVID work practices.
Kowloon
Overall rent trend in Kowloon was similar to that on Hong Kong Island, but transaction volume dropped by 40% MoM in December, which followed a similar pattern in the same festive period in previous years.
Only a handful of new letting transactions were observed over the month but mostly in the area near the Express Rail Link Station, suggesting some positive signals for the year ahead.
Looking forward, we expect Kowloon market to remain stable in Q1. While some companies will continue relocations for cost optimisations or operation enhancement, Q2 will see more solid positive effect from border reopening on the occupiers’ demand and hence the market trend impacts.
Residential
In December, the Hong Kong Monetary Authority (HKMA) increased its base rate by 50 basis points to 4.75%, close to the rate last seen in January 2008. Rising interest rates and the weak domestic economic outlook have prompted more people to delay buying decisions.
Statistics from the Rating and Valuation Department show that overall residential home prices dropped 3.3% MoM in November, reaching a five-year low.
A handful of notable transactions were recorded, which helped explain the positive prospects for the luxury residential market.
On the leasing front, there was an increasing number of enquiries from overseas tenants recorded during the month. Leasing activity has been gradually picking up, supported by more expatriates returning to the city, following the relaxation of border restrictions. Homeowners were more flexible in their negotiations and offered incentives such as rent-free periods to attract tenants.
Looking ahead, taking the likely slowing of interest rate hikes and the border relaxation with Chinese mainland into account, market activity is expected to pick up gradually after Chinese New Year, and overall transaction volume is projected to see an uptick in 2023.
Retail
The market saw signs of a gradual recovery in inbound tourism. Thanks to the further relaxation of pandemic-related measures and the announcement of the reopening of the border with China. For the first 11 months of 2022, the total value of retail sales decreased 1.1% YoY. Fuelled by the recovering market, the retail leasing market gradually regained momentum in January.
The capital market for retail properties was also buoyant in January.Despite the discounts, these large retail property acquisitions indicate increased investor confidence in the long-term market outlook.
Looking ahead, with the further relaxed social-distancing rules and the removal of restrictions on arrivals, we believe retail sales are set to pick up in 2023. We are cautiously optimistic about the impact of the border reopening, and we expect to see a stable recovery trend in the retail market following the return of mainland Chinese tourists. Overall, we expect retail rents to remain under pressure and drop 0-5% during 2023, owning to external uncertainties.