Commercial property investments plunged 71% in H1

This marks the lowest for a six-month period since 2009.

The total commercial sector, which includes deals over $1.29m (US$10m) and excludes pure land sales, accounted for 40 deals totalling $13.2b of the overall property investment turnover in H1, according to an CBRE report. This represents a 71% crash YoY and makes up for only 18% of 2019’s full-year total.

Further, the figure marks the lowest for a six-month period since 2009. Local investors and developers led investment activity, accounting for 75% of the total investment volume in H1.

Capital values across all commercial sectors fell, but largely to adjust for rental declines. The number of distressed assets remains limited and yields have only expanded marginally. The retail sector logged the largest price drop across all sectors as it fell 25% YoY in H1, whilst offices recorded a 19.6% drop in prices over the same period.

Meanwhile, capital values of industrial properties showed a more relaxed decline as it dipped 5.9% YoY, thanks to the sustained investment demand for properties suitable for redevelopment.

“Many of the asset price devaluations followed the downward trend of rental rates. However, strong liquidity and low holding costs combined to support asset prices” said Reeves Yan, executive director of capital markets at CBRE Hong Kong.

He expects a mild year-on-year improvement in economic momentum in H2 2020, given the low base set in Q3 and Q4, 2019. “Properties that are suitable for the tech, medical and education sectors will continue to be on investors’ radars,” Yan said.

Waning rents
Retail properties led the decline in commercial property investments as overall vacancies along Tier-1 streets climbed to a four-year peak of 13.5%, with fashion and luxury retailers generally consolidating their footprints.

As a result, high street rents slipped 15.2% YoY in H1, whilst shopping mall rents remained unchanged as landlords introduced a range of promotional measures. Currently, average rentals in core retail districts stand at the 2005-2006 levels, but are still around 40% above 2003 SARS levels.

Retail leasing activity also remained subdued, with short-term agreements and pop-up stores accounting for the bulk of new leases. CBRE adds that restaurant operators continue to capitalise on lower rents.

Total retail sales dropped 34.8% in the first five months of 2020 as tourist-oriented trades such as watches & jewellery took the hardest hit plummeting 67%.

“Whilst there are global retail chains leaving Hong Kong due to broader external economic reasons, over 20 new overseas retailers have set foot in Hong Kong in H1 2020 despite the turbulent environment. Japanese retailers are particularly keen on the Hong Kong market, having leased over 85,000 sqft of space in the city over the past six months,” said Lawrence Wan, senior director of advisory & transaction services–retail at CBRE Hong Kong.

He also added that even as the overall retail environment will remain difficult in the remainder of 2020, opportunistic retailers are expected to leverage on falling rents and explore different leasing options.

On the office front, rents crashed 10.3% in the overall market in H1. Of this, Hong Kong East is considered as an outperformer with a 4% drop recorded during this period. Rents dropped the most during March and April when the pandemic was at its peak in Hong Kong, which then softened in May and June as business momentum gradually improved.

Net absorption fell to -1.28 million sqft in H1, which marks the weakest leasing market on record. Vacancies continued to climb and set a 11-year high record across most submarkets. However, CBRE said that Central’s vacancy, climbing from 1.5% in H1 2019 to the current 4.3%, is still considered low and manageable by global standards. Availability of whole-floor, contiguous-floor options remains tight for larger occupiers.

“Whilst we are seeing inspection activities gradually picking up, occupiers remain very cautious. A majority of current leasing mandates are for cost-control or cost-saving purposes, whilst new and expansion needs remain very limited,” said Alan Lok, executive director of advisory & transaction services–office at CBRE Hong Kong.

Lok also noted that increased space availability is set to benefit mainly small-to-medium sized occupiers, as over 70% of vacant space in the core submarkets are less than 10,000 sqft—leaving a relatively small amount of space that will suit larger occupiers.

Lastly, industrial and logistics property rents fell the least at 4.2% YoY in H1. Some warehouses maintained positive absorption over the same period and downward pressure on rentals is only evident in respect of a few individual properties. CBRE adds that these individual properties are not necessarily the more expensive ones.

However, leasing momentum amongst industrial and logistics properties slowed amidst weakening global demand. Whilst most occupiers were cautious and adopted a wait-and-see approach, demand from companies catering to local consumption remained resilient. Warehouse vacancies rose to 3.8%, whilst immediate vacancy remained limited.

“Subdued global trade demand will continue to undermine warehouse demand in the second half 2020. Sizable occupiers expect to see more leasing options in H2 as some space where leases are expiring returns to the market. The shift in spending patterns to online consumption suggests a greater need for industrial space for data centers,” Samuel Lai, senior director of advisory & transaction services – Industrial at CBRE Hong Kong, commented.

Looking forward, Hong Kong’s business environment is set to gradually recover in the next few months. Corporates are likely to remain cost sensitive in the short-term. More real estate market activities in H2 could be seen as corporates and investors capitalise on lower rents and property prices, whilst transaction volume is also projected to climb.