What hinders property market recovery in Hong Kong?

The office and residential markets continue to face downward pressure.

The commercial investment and housing markets in Hong Kong are grappling with stringent mortgage loan approvals and high interest rates, which are expected to further decrease property prices over the next six months, according to JLL's mid-year market review and forecast.

"The stringent mortgage loan conditions have dampened the purchasing enthusiasm of investors, resulting in a decline in transaction volume. Such will further suppress the capital values of properties,” said Cathie Chung, senior director of Research at JLL.

“The commercial investment and home sales markets have been hit the hardest, ultimately affecting the overall economy. Demand-side support from the government is needed before the public loses confidence in the property market,” she added.

The office leasing market saw limited expansion and more lease renewals, leading to a soft performance in the first half of 2024. Gross leasing volume dropped by 28.1% from the latter half of 2023. Despite this, the market recorded a positive net absorption of 502,300 square feet due to the realisation of pre-committed space from new completions. 

The overall vacancy rate hit a record high of 13.6% by the end of June, influenced by new office supply. Overall Grade A office rents declined by 4.3%, with Central experiencing the sharpest drop of 7.1%.

The FIREBS industry (finance, insurance, real estate, and business services) dominated leasing activities, accounting for 52.6% of the volume, with insurance and wealth management sectors being particularly active. 

Large occupiers are capitalising on more affordable rentals to upgrade their office spaces, with sizable transactions of 20,000 square feet or more making up 29% of the total leasing volume in the first half of the year.

Retail market recovery is hindered by increased domestic consumption leakage due to strong northbound and outbound travel.

Although inbound arrivals rose by 64.2% year-on-year, departures of Hong Kong residents exceeded inbound tourist visits by 48.3%. Additionally, average spending per tourist on shopping and dining decreased by 17.4% in the first quarter of 2024 compared to the previous year.

High Street shop rents grew by 3.0%, whilst Prime shopping mall rents increased by 0.9%. 

Leasing activities were polarised, with both high-end and mass-market tenants becoming more active in top-tier shopping streets, leading to a slight improvement in the High Street shop vacancy rate to 11.5% from 11.6% at the end of 2023. Lower-tier streets struggled to attract tenants despite offering negotiable rents.

Over the last six months, the influx of international brands entering the Hong Kong market grew by 91% YoY. Mainland Chinese brands, accounting for 33% of these newcomers, have surpassed Japanese retailers, emerging as the most active new entrants in the city.

Meanwhile, the removal of cooling measures did not stop home prices in Hong Kong from declining, with a 1.7% drop in the RVD private domestic price index year-to-May, a 23.1% decrease from the September 2021 peak. 

High financing costs and stringent mortgage approvals are dampening local buyer enthusiasm, whilst a price war in the primary market sees new project prices reaching decade lows. However, strong rental growth and increasing demand from mainland Chinese buyers are buoying the market.

Investment in commercial properties valued at HKD50m or above also dropped by 25.6% to HKD 13.2b in the first half of the year, the lowest level since 2020. 

Retail properties remained the most popular investment asset, accounting for 45.1% of total commercial property investments, supporting a 0.5% capital value growth in High Street Shops.

The inflow of global capital into the local market contracted, with its portion falling from 5.9% in the second half of 2023 to 0.6% in the first half of 2024.