Knight Frank launches the latest Hong Kong Monthly Report. The weak economy and the lingering impact of the COVID-19 pandemic continued to weigh on the Grade-A office market, but the rent declines have provided a golden opportunity for tenants to upgrade their offices to more premium buildings with attractive packages. In the residential market, with the number of infections dropping gradually in late August, potential buyers became active in flat viewing again, leading to improved sentiment in the residential market. Looking ahead, purchase sentiment in the residential market is expected to remain upbeat as the COVID-19 situation stabilizes. With the absence of inbound tourism and a deteriorating labour market, Hong Kong’s retail market has seen the worst period in decades. Most retail sales so far this year reflect spending on basic necessities.
Grade-A Office
Hong Kong Island
In August, rents in Central dropped 20.1% YoY and rents in the overall Hong Kong Island market declined 18.7% YoY. The rent declines have provided a golden opportunity for tenants to upgrade their offices to more premium buildings with attractive packages. With market conditions remaining uncertain moving into Q4 2020, we expect the overall vacancy rate for office space to stay high and demand to remain weak.
Kowloon
Kowloon witnessed a decline in leasing activity in the first three weeks of August, while business sentiment improved at the end of August. As the COVID situation appears to have stabilized in Hong Kong, we expect the rental declines to narrow, at least for the next month or so. With stable demand from sourcing and electronics companies, office rents in core Kowloon districts are expected to bottom out in the near term.
Residential
With the number of infections dropping gradually in late August, potential buyers became active in flat viewing again, leading to improved sentiment in the residential market.
Against the backdrop of a slight decline of 0.5% in overall residential prices in July, according to the latest official statistics, buying sentiment has been well supported by low interest rates and incentives offered by developers, such as discounted mortgage plans. In the primary market, newly launched projects continued to draw interest, indicated by brisk sales in new projects.
Looking ahead, purchase sentiment in the residential market is expected to remain upbeat as the COVID-19 situation stabilizes. That said, prices will still be under pressure because of protracted unfavourable factors, including the weak economy and rising unemployment rate, which might erode affordability over time. Overall residential prices are expected to fall gradually for the rest of 2020.
Retail
Hong Kong’s retail sector continued to bear the brunt of the COVID-19 pandemic. With the absence of inbound tourism and a deteriorating labour market, Hong Kong’s retail market has seen the worst period in decades. Pop-up stores has become a lifeline strategy for some retailers.
With tourist spending of around HK$140 billion removed this year, retail sales could bottom out at about HK$320 billion in 2020. This amount, on par with the level in 2010, represents a new benchmark for annual retail sales for Hong Kong as it transitions to a new decade.
The lingering impact of the COVID-19 pandemic has taken a heavy toll on Hong Kong’s luxury retail market, which supported the growth in prime street rents until the past year. We believed that the vacancy rate in prime streets will continue to surge and that prime street shop rentals will continue to face downward pressure for the rest of 2020.