Knight Frank launches the latest Hong Kong Monthly Report. The coronavirus (COVID-19) outbreak has posed a new threat to Hong Kong’s Grade-A office market, which has already been subdued in the wake of social unrest and trade disputes before the outbreak. Kowloon saw a significant decrease in tenant movement, e.g. office on-site inspection. In the residential market, because of the outbreak, a “wait-and-see” attitude is prevalent. For the retail sector, we expect the weak retail landscape to persist at least throughout 1H 2020.
Grade-A Office
Hong Kong Island
The COVID-19 outbreak has posed a new threat to Hong Kong’s Grade-A office market, which has already been subdued in the wake of social unrest and trade disputes before the outbreak. Premium Central office space was the hardest hit, with rents dropping by 20% YoY in January. Many companies have cautiously put their expansion plans on hold. Bracing for more pressure on rents, many landlords are warming to the idea of offering rental concessions to secure renewals. Interestingly, this downward pressure on rents has led to some tenant activity as they search for relocation options.
Kowloon
Kowloon saw a significant decrease in the number of office on-site inspections and in tenant movement. Many companies have deferred their expansion or relocation plans to save for contingencies. In contrast, renewal cases were on the rise, though most were for short-term tenancies. Most of the new lettings recorded during the month were small offices of less than 3,000 sq ft, at monthly rents below HK$25 per sq ft.
Subdued demand combined with substantial supply has weakened the bargaining position of some Kowloon landlords. Under the current market conditions, the scale is firmly tilted towards tenants in lease negotiations in the coming months.
Residential
Because of the outbreak, a “wait-and-see” attitude is prevalent in the market. Transactions dropped 13.3% MoM, falling to a 13-month low of 2,762 units in January, according to the Land Registry. Developers also held back launching new projects and pursued sales of unsold stocks in the market. As a result, both viewing and sales activities slowed down.
With home buyer confidence ebbing, there were more cases of deposit forfeits in January. Lack of activity is also affecting the leasing market. Landlords are more flexible in leasing terms and are willing to offer short-term leases to attract tenants.
Despite growing uncertainty, recent large land sales suggest that developers remained optimistic about the long-term outlook.
With fewer units available in the market and less sales activity, transaction volume, especially in the primary market, is expected to drop in the next one to two months. History shows that the market impact of a virus will not persist indefinitely. Therefore, we do not expect massive price cuts like those during the SARS outbreak in 2003.
Retail
After 11 months of decline, Hong Kong’s retail sales value dropped again in December by 19.4% YoY. Sales further plummeted during the Chinese New Year period because of the coronavirus outbreak.
Most leasing activity was on hold, even for short-term leases of temporary retail space. For example, pop-up stores, used by brands during the social unrest to avoid long-term commitments, were no longer prevalent.
As people stayed at home, all retail and entertainment outlets saw limited foot traffic and reduced sales. Retailers and some restaurant operators have shut down some outlets permanently. Meanwhile, some international brands, have retreated from the Hong Kong market.
The situation has resulted in most shopping malls, including premium malls with a relatively stable tenant mix, to introduce relief measures, including rental reductions or rent-free period for tenants.
We expect the impact of the COVID-19 on the market to be more severe than the SARS impact. It will take longer for the retail industry to pick up. We expect the weak retail landscape to persist at least throughout 1H 2020.