Capital values of mass residential remain resilient in H1.
Price correction in Hong Kong’s commercial property leasing and investment markets will be less severe and will see green shoots of hope in the medium term, according to a JLL forecast.
JLL adds that capital values of mass residential remain resilient in H1; however, the rising unemployment rate will weigh on housing prices by the end of this year.
JLL Hong Kong head of markets Alex Barnes notes that leasing demand will remain subdued in H2 due to the weakened economy and grade A office rents will drop 20-25% this year, after dropping 13.2% over the last six months.
“Central rents will face the strongest downward pressure due to elevated vacancy, dropping 25-30% in 2020. The rental drop will be less severe in the second half,” he added.
In the office market, corporates are delaying decisions on office requirements due to the persisting uncertainty from the pandemic. New lettings in terms of floor area in the overall grade A office market dropped by 53% in the first half of this year as compared to the same period last year.
Furthermore, the overall grade A office market recorded a negative take-up of 1.42 million sqft, amongst the highest withdrawal in the overall market ever recorded. Meanwhile, leasing demand in decentralised submarkets fared better, benefitting from tenants seeking cost-effective offices to manage real estate costs amid uncertainty.
Vacancy rate in the overall grade A office market hiked to 7.6% due to the weakened leasing demand along with the ongoing decentralisation and consolidating/downsizing requirements.
Surrender space has reached an 18-year record high, amounting to 1.3 million sqft with 74% of the space located on Hong Kong Island, due to corporates’ cost cutting initiatives.
Moreover, Central’s grade A office rents dropped 17.6% in H1 to $100 per sqft, the sharpest rental fall among the office submarkets.
However, Barnes notes that secondary listing of PRC firms on the HKEx is expected to lead a pick-up in leasing demand in the city. Rental correction will also increase the city’s operational competitiveness and encourage medium-term growth for a number of industries who may otherwise be constrained by rental cost.
Meanwhile in the retail market, total visitor arrivals plunged 88.2% YoY in the first five months and even hit the historic low of about 4,000 in April due to the travel restrictions and quarantine measures.
Retail sales of jewellery and watches dropped 67% YoY during the first five months of the year, the sharpest fall in the retail market. Only the retail sales of supermarkets recorded growth during the period.
Moreover, hiking vacancy pressure has led the rents of high street shops in the four major shopping districts to drop 26.5% in H1. Rents of prime shopping malls also dropped 20.8% during the same period.
JLL Hong Kong head of retail Oliver Tong notes that the leasing demand will remain weak in the H2 but mass to mid-market operators from overseas remain keen to expand in Hong Kong, whilst luxury retailers will continue to consolidate their portfolio or relocate for cost-efficiency.
The retail market is said to rely on local spending and high street shops rents are expected to drop 35% to 40% this year, whilst prime shopping centre rents will drop 25% to 30%.
“In the medium to long run, we expect to see a more diverse and healthy market environment, where retailers and landlords will further develop exciting concepts to create better customer experience, bringing the Hong Kong retail scene to the next level,” he added.
Meanwhile in the residential market, luxury residential capital values were largely flat in Q2, yet there were very limited transactions in the market compared to historic levels. Only an average of 561 residential dwellings worth over $20m changed hands per quarter H1. This is compared to an average of 710 per quarter in 2019.
Rents have also dropped 6.5% in the first half amidst notable decline in expatriate demand and downgrading tenant trends.
Mass residential prices are expected to drop 5% to 10% this year, whilst the capital values of luxury residential will drop 10% to 15%, said Joseph Tsang, chairman and head of capital markets at JLL in Hong Kong.
In the investment market, total investment volumes of commercial properties worth $20m and above plunged 63% YoY to $20.6b in H1. About 58% of the investment volumes were retail properties lifted by a few large asset disposal transactions by portfolio landlords.
Further, total investment volumes of office properties plummeted 91% to $3.11b as the bid-offer gap has widened under an uncertain market outlook.
Grade A office investment appeal waned as rental decline sharpened whilst capital values fell 14.1% in H1.
Off thin transaction volumes, capital values of high street shops fell 24% in H1. High street shops' rental values and capital values have already undergone substantial correction and are bottoming.
Tsang adds that the sentiment in the investment market will remain weak in H2 due to the pandemic, increasing East-West tension and weak economy.
Capital values of high street shops are expected to drop 35-40% this year, whilst capital values of grade A offices will fall 20-25%. The impact on prime warehouses would be moderate, whilst its capital values will only drop 5-10% in 2020, she notes.
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