Grade A office capital values may drop 10% in 2019

Central and Kowloon East are forecasted to post the slowest growth.

Hong Kong’s commercial property market may continue to be clouded over in 2019 amidst escalating trade tensions between US and China as capital values of Grade A offices are projected to drop 10%, according to JLL’s year-end property market review and forecast.

In 2018, Grade A office’s net absorption amounted to approximately 2.8 million sqft, reaching a three-year high, the report highlighted. However, demand for office space softened in H2, most notably from Mainland companies, that accounted for just 30% of all new lettings in Central in 2018 compared with 48% in 2017.

The availability of space remained tight with vacancy rates falling below 2% across all submarkets in 2018, excluding Kowloon East, JLL observed. The vacancy rate in Central remained at close to historic lows and the low vacancy situation is projected to remain over the short-term with the next wave of new supply not expected to reach the market until 2021.

“Tenant decentralisation remained a key theme in the leasing market with more multinational corporations opting to relocate to more cost effective locations,” JLL said in a statement.

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“Weaker demand will put upward pressure on vacancy rates and translate into slower retnal growth,” JLL head of agency leasing Ben Dickinson said in a statement. “But the current extremely tight vacancy environment will support office rents to grow a further 0-5% in 2019.”

Central and Kowloon East are forecasted to post the slowest growth with Central at the most exposed due to the slowdown in PRC demand, he added.

On the retail front, overall rents are also projected to soften in the 0-5% range in 2019, although rents in prime shopping centres could hold firm, JLL head of retail Terence Chan said in a statement.

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“The recovery of the retail sector seen in H2 is expected to lose momentum next year as a depreciating RMP and softening locan consumer sentiment hit sales,” he said. “The opening of new cross-border transport links may partially offset the negative impact but are unlikely to reverse broad trends.”

Meanwhile, preliminary data from JLL shows total investment into commercial and industrial property crashing 35% in 2018 after reaching a record $157.4b in 2017. Investment volume into retail properties reported the sharpest decline at -66% due to the absence of large portfolio sales.

Mainland's investment into Hong Kong’s commercial industrial property markets was up 22% to $24.4b in 2018, JLL noted in its report. However, interest from the cohort fell noticeably in the second half due to the uncertainties in the mainland economy and stricter enforcement of capital controls.

“We expect investment volume in 2019 to fall as a dour outlook for the local economy and rising interest rates drives investors to the sidelines,” JLL managing director Joseph Tang said in a statement. “Mainland demand will remain subdued with China unlikely to loosen capital controls amidst a slowing economy.”