Office and retail sectors remain highlighted in Hong Kong’s property market

The two sectors are eyed as market focus, with prospective rental growth of 25% in 2011 for the Office Sector and 20% for Retail Sector.

According to the latest Colliers International The Knowledge report, 1Q 2011, all four sectors namely Office, Luxury Residential, Industrial and Retail are on the upward swing with the spotlight on the Grade A Office Sector which projected a growth of 12.8% quarter-on-quarter (QoQ).

“With sustained expansionary demand among existing tenants and limited supply in the marketplace, coupled with buoyant demand fundamentals attributed to the finance industries, we foresee rentals in Central very likely hitting a post-2008 record high in the second half of 2011,” said Simon Lo, Director of Research and Advisory, Colliers International Hong Kong. Looking forward, the Office and Retail Sectors are anticipated to become the market focus, with prospective rental growth of 25% in 2011 for the Office Sector and 20% in the next 12 months for Retail Sector.

Office Sector
The local Grade A Office Sector is anticipated to post further growth in 2011 in anticipation of a sustained imbalance between supply and demand in the marketplace. Given the projection that the next supply cycle will not kick in before 2014, and the buoyant demand fundamentals attributed to the finance industries, average rental rate in the overall market is predicted to grow 25% in 2011.

From an occupational perspective, the lack of leasing options has been the key challenge to most tenants, as well as rising rental costs. To overcome the challenge, tenants have turned to decentralisation as well as exploring options in second-tier buildings. Against a backdrop of limited stock for sales, investors turned to the second-tier office developments in business locations such as Wanchai and Causeway Bay, where capital values were generally lower than similar assets in Central. In 1Q 2011, both end-users and investors were becoming more active in acquiring second-tier office space in the Grade B market.

Predicts Lo, “Given the better rental yields available in the Grade B office market and the increasing volume of liquidity, we expect the existing yield gap between Grade A and B market to narrow in the second half of 2011.”

Luxury Residential Sector
With the relatively low interest rate environment and limited luxury residential supply, the overall luxury residential prices edged up further by 3.4% QoQ to HK$18,806 per sq ft as of February 2011, surpassing the previous peak in mid-2008 by 25%. Notwithstanding the market consolidation in terms of sales volume over the short to medium run, the sustained low interest rate environment, rising inflation and tight luxury residential supply, luxury residential prices will grow further. Overall, luxury residential new supply between 2011 and 2013 was 60% below its long-term average of 549 units. Looking forward, luxury residential property prices will have a prospective upside of 6% over the next 12 months.

On the luxury residential leasing front, sustained rising occupational demand and increasing inflationary pressure will continue to drive rental upwards, with a double-digit growth of 13% over the next 12 months. Meanwhile, rental level will surpass the previous peak level of 2008 by 2Q 2011. In addition, more expatriate families are expected to arrive by 2Q 2011, leading to higher demand for houses and large-sized apartment units.

Industrial Sector
The overall industrial market continued to enjoy positive spill-over from the traditional Office Sector due to the sustained increase in rentals in the office market. As at the end of February 2011, the average rental in the factory sector increased 6.2% quarter-on quarter (QoQ) to HK$7.76 per sq ft per month, compared with the growth of 3.9% QoQ recorded in the preceding three-month period.

However, with the recent catastrophe in Japan, negative impact on Hong Kong’s external trade is expected to become apparent over the next few months. Nevertheless, growth in the Mainland and other Asian economies will continue to be beneficial to the Hong Kong economy, providing an offset to the negative effect of the incidents in Japan. Although the pace of growth of external trade will be dampened, sustained growth in external trade volume will underpin the demand for logistics services, which in turn will translate into demand for industrial premises and in particular logistics warehouse premises. It is anticipated that the rentals of factory and I-O buildings would increase 15% over the next 12 months. On the warehouse premises front, the rentals are expected to increase 12% during the same period. Meanwhile, in view of continued buying demand from investors and end-users, industrial prices are expected to increase 15%-18% over the next 12 months.

Retail Sector
Market focus continued to be on traditional shopping districts (i.e. Causeway Bay, Central, Tsim Sha Tsui and Mong Kok) with average rental rising by 8.1% QoQ in 1Q 2011, following a growth of 5.3% QoQ in 4Q 2010. The growth momentum in 1Q 2011 was predominantly driven by the double-digit growth in prime street rents in key shopping districts, such as Canton Road, Russell Street and Queen’s Road Central.

On the flip side and similar to the Industrial Sector, the recent Japan disaster may have a negative impact on the Retail Sector but as of this point, it is difficult to assess the actual impact. 

Says Lo, “The disaster has clearly highlighted the importance of the Japanese supply chain of a variety of goods, such as Hong Kong imports of food and consumer products, e.g. cosmetics and electronics. Businesses that rely on sourcing from Japan may go out of business, potentially causing more retail spaces available for lease in the marketplace, thus leading to slower growth momentum in rents. However, as Hong Kong’s retail market is largely driven by healthy economic fundamentals of the local economy, robust growth and ever-rising visitor arrivals from Mainland China, there is a strong likelihood that the positive support will provide an offset to the possible negative effects of the incidents in Japan.”

Looking forward, overall retail rent in core shopping areas will grow further by 20% in the next 12 months. It is expected to surpass the previous peak level in mid-2008, possibly by 2Q 2011.