Hong Kong property rents and prices to hit a reverse next year

Retail properties offer greener pastures amid the subdued outlook.

With prices and rents hitting all time high, all indications suggest that the end of Hong Kong property market’s bull-run is near after almost 24 months of unrelenting spikes. Colliers International projected today that all properties – with the exception of ground-floor retail properties in traditional shopping districts - will enter a down cycle in 2012.

“Over positive buyer sentiments coupled with a dire lack of supply across all sectors have catapulted the local property market - with the exception of luxury residential which saw no change from end 2010 due to the correction in late 2011 – into a booming core with the retail sector taking the lead,” said Richard Kirke, Managing Director, Hong Kong at Colliers International. “Without substantial economic fundamentals, all that goes up will eventually come down. We are already seeing noticeable weakening signs since the second half of 2011, hence we expect subdued outlook for rents and prices in Grade A office, luxury residential and industrial property sectors in 2012,” he adds. Kirke is also of the belief that ground-floor retail properties in core areas will be the only sector to see continued increase albeit at a slower growth.

Property Investment Market
In the first eleven months of 2011, there were 792 property investment transactions valued over HK$30 million each, which increased 52% YoY significantly. Meanwhile, the total transaction value amounted HK$97,702 million, representing a rise of 19% YoY.

In 2011, retail properties and strata-title offices are the most sought-after, collectively contributing to 80% of the overall investment transaction volume from January to November 2011.

However, after a strong head start in this year, the steam is slowly letting out with the presence of various challenges in store for the property investment market in 2012.

According to Antonio Wu, Executive Director of Investment Services Asia at Colliers International, factors such as limited supply in the market, the deepening credit crunch as well as the widening gap between the bank’s interest and capitalisation rates will form the core barriers to continued growth in the property investment market.

Wu was also quick to inject that despite the presence of these factors, the investment property market’s outlook for 2012 is not all gloom and doom as investor sentiment and demand are on a forward surge. “We expect en-bloc offices, strata-title offices particularly those in Kowloon East, hotels and serviced apartments to be the hot favourites in the property investment market. All bets are also on industrial assets located in the vicinity, as undoubtedly market growth and potential will rise from the stimulation efforts made by the government’s re-vitalisation scheme,” said Wu.

Grade A Office Market
The average Grade A office rent and price registered 14% and 18% growth, respectively, in the first ten months of 2011. “As Central office rents have seen continued rise from the period after financial tsunami till 2Q 2011, some tenants in Central have come to the realisation that rents have exceeded their affordability and are now seeking alternatives in the sub-market or other districts,” commented Wendy Lau, Executive Director of Office Services.

“In view of the substantial rental premium of Central over individual office districts, the pressure of decentralisation is expected to continue in 2012. Considering a general deterioration of business conditions that affects business expansion plans which subsequently slows occupational demand, Grade A office rents and prices are projected to fall 8% and 16% respectively, in 2012,” forecasted Lau.

Luxury Residential Market
Luxury residential prices edged up 6% over the period between January and October 2011. However, with a correction at the end of this year, prices by the end of December 2011 are estimated to return to a level similar to that of end 2010. In terms of luxury residential rents, rates were up 7% in the first ten months of 2011.

“Prospective buyers are largely made up of end users, estimated at 60%, with buyers from Mainland China constituting approximately 15% of the whole pie,” said Ricky Poon, Executive Director of Residential Sales.

“Effective mortgage rates in 2012 are anticipated to continue the uptrend and rise further to over 4% per annum. In the short term round up, many potential buyers will likely remain a wait-and-see attitude which will in turn bring a quieter first quarter in 2012. With this in mind, luxury residential prices are projected to edge down 13% in 2012.”

On the leasing front, hold back in the inflow of expatriates, particularly in the banking and finance sector, amid global market uncertainty will bring a slowdown in the demand of luxury residential leasing. In the next twelve months, luxury residential rents are projected to drop 6%.

Industrial Market
The local industrial property market has been resilient in 2011. Over the first ten months this year, the average industrial rent and price increased 12% and 17%, respectively.

“While all eyes are currently on the potential of Kowloon East brought about by the re-vitalisation scheme as well as the government’s “Energising Kowloon East” initiative in infrastructure development and town planning, we feel that the industrial property market will unlikely be spared from a decline in 2012 as re-exports are anticipated to register negative growth amid worsening global economy. In the next twelve months, the average industrial property rent and price will likely fall 4% and 6%, respectively,” said Simon Lo, Executive Director of Research & Advisory, Asia.

Retail Market
The retail leasing market growth is the strongest among all the other Hong Kong property markets in 2011, registering 21% increase in the first ten months of this year.

“The retail market is supported by buoyant retail sales, achieving over HK$32 billion worth of sales per month in 2011,” said Lo.

He feels that this remarkable achievement is largely attributed to continued growth in inbound tourism, which benefits traditional shopping locations in particular. “The retail leasing demand is predominately led by retailers of jewellery, cosmetics/skincare, electrical appliances and fashion, which are especially favoured by tourists from Mainland China,” continued Lo, according to a Colliers International report.

Amid the exceptional growth in the retail property in 2011, the market sees deepening segmentation, with performance of properties in traditional shopping districts far outpacing that in the second-tier areas. Further, international brands are quickly dominating the scene as local retailers fail to secure prime shops at core districts due to their inability to pay premium rents.

In 2012, retail property rental and price increases are expected to taper off although it is the only sector projected to see further growth. “The retail market still has room for growth with tourist arrivals showing no sign of abating. However, with the weakening local as well as global economy in 2012, the growth of ground-floor retail shops in terms of its rents and prices are projected to slow to 12% and 8%, respectively, in the next twelve months,” concluded Lo.