Knight Frank launches the latest Hong Kong Monthly Report. In Hong Kong Grade-A Office market, while office rents continued to drop in the downbeat market, tenants seized the opportunity for better relocation options. On Kowloon side, new letting cases in October recorded a smaller average leasing size and lower unit rent. Homebuyer sentiment in the residential market remained positive in October, given the stable epidemic situation in Hong Kong. Primary sales recorded a 29% surge MoM. The economic recession, heightened job insecurity, and rising unemployment have all but sealed the fate of the retail sector.
Grade-A Office
Hong Kong Island
While office rents continued to drop in the downbeat market, tenants seized the opportunity for better relocation options, resulting in high activity in the leasing market during the month. However, landlords further softened their approach and adopted a more realistic stance in negotiating leasing terms to secure tenants, so the majority of tenants tended to renew their leases. As a result, new take-up of Grade-A office space was at an exceptional low level during the month, particularly in the CBD area.
Going into 2021, we therefore expect to see a continuing decentralisation trend.
Kowloon
Compared to the previous month, new letting cases in October recorded a smaller average leasing size and lower unit rent, ranging from HK$18 to HK$25 per sq ft, indicating that tenants are increasingly cautious about rental expenditure.
Most of the new letting cases were dominated by SMEs, while sizable companies preferred renewals rather than relocation to avoid substantial fit-out costs.
A vast number of tenants in Kowloon are in trade-related sectors, which are expected to be heavily impacted by the U.S. presidential election and the related tariff and trade policies. These companies, especially U.S.- and Europe-based companies, are likely to slow down their leasing decisions.
Residential
Homebuyer sentiment in the residential market remained positive in October, given the stable epidemic situation in Hong Kong. According to the Land Registry, a total of 4,951 residential transactions were recorded in October, on par with the level in September. Primary sales accounted for 1,046 cases, a surge of 29% MoM. There were close to 4,000 transactions in the secondary market in October amid mixed sentiment. Some owners sold their properties at a loss, given the economic recession and rising unemployment rate. Meanwhile, buyers seized opportunities in the down market to purchase properties.
Looking ahead, with economic uncertainties still lingering, large-scale layoffs and pay cuts are expected to gradually emerge. This will weigh on both the sales and leasing markets in the coming months.
Retail
Hong Kong’s retail market remained subdued, given poor consumer sentiment and the absence of inbound tourism.
As the retail market has been in the doldrums for a prolonged period, more and more retailers have struggled to keep their businesses afloat, adding pressure to the already alarmingly high shop vacancy rates and downswing in shop rents. We have seen street shop landlords becoming much more flexible in negotiating rent and lease terms under the sluggish market conditions.
The economic recession, heightened job insecurity, and rising unemployment have all but sealed the fate of the retail sector. We expect the F&B sector to continue to face tremendous challenges under the prevailing social-distancing measures, and restaurant receipts to continue their downtrend. With declining rental affordability across the board and no silver lining in sight, we expect retail rents to drop further in 2021. Beyond that, we foresee the significant rental corrections will lead to a new retail landscape that will reshape a “new norm” for the sector.