- Home prices saw the steepest increase ever in early 2019 before the gains were trimmed by weakened sentiment and falling sales in the second half of the year
- Office rents peaked in Q1 and have since fallen over the course of 2019
- The retail sector was hardest hit by the social unrest which stifled any hope of a rebound in retail rents for core submarkets
- The volume of major property transactions shrank to a 10-year low alongside the decline in commercial real estate rents
- The leasing and investment outlook across all sectors in 2020 is set to remain subdued as US-China trade tensions and local social unrest continue to weigh on sentiment.
HONG KONG, CHINA - Media OutReach - 10 December 2019 - The Hong Kong property market has borne witness to the city's turmoil in 2019. Home prices experienced their steepest increase in the first half of 2019 but have seen those gains trimmed in recent months in the face of the growing social unrest. The ongoing trade tensions and social unrest have weighed on business sentiment and caused visitor arrivals to plummet, resulting in falling retail sales, and weak leasing demand. As a result, commercial real estate rentals have fallen, which has in turn affected the performance and outlook of the property investment market, with transaction volumes in 2019 falling to a decade low, as noted by Cushman & Wakefield, a leading global real estate services firm.
Residential: Sentiments chilled after robust H1
The residential market began 2019 on a positive note with home sales volume rebounding in Q1, growing by 55% quarter-on-quarter, amid a truce between China and the U.S. on trade talks and the expectation of rate cuts. The upbeat momentum extended into Q2 when residential S&Ps peaked at 8,208 in May, the highest level in six and a half years. However, the unfolding of the social unrest since late Q2 chilled the market sentiment. Home sales began to fall in Q3, reaching as low as 3,447 residential S&Ps in September. The relaxation of LTV ratios, effective from mid-October, provided the market with a temporary boost, driving total home sales up to 9,757 S&Ps in Q4 through the end of November. Based on an estimate of 4,000 residential S&Ps for December, the total home sales in Q4 would amount to 13,757, up 12% from Q3. Although that would amount to a drop in home sales in H2 2019 of 24% from H1, total sales volume for the year would still be up for 2019, by 5.9% year-on-year.
Mr Alva To, Cushman & Wakefield's Vice President, Greater China & Head of Consulting, Greater China commented, "The escalation of China-U.S. trade tensions and the expectation of rate hikes in 2018 resulted in huge uncertainties that discouraged home sales. However, as the market became accustomed to the uneven progress of the trade talks, and with three rounds of rate cuts instead of rate hikes, home sales volume rebounded this year based on strong pent-up demand, despite the impact of the social unrest in H2. Economic factors still weigh more heavily on buyers' decision making."
Beginning in January, home prices among mass housing estates tracked by Cushman & Wakefield all climbed for five consecutive months, reaching a peak in June. Among them, mass residential estates such as City One Shatin and Taikoo Shing recorded price increases of 36% and 29% respectively from their trough levels in January, and luxury residential estates such as Residence Bel-Air and The Habourside saw price increases of 14% and 16% respectively within the same period. After peaking in June, the price level among all estates began to fall due to worsening market sentiment and a drop in overall sales volumes. As of mid-December, City One Shatin, Taikoo Shing, Residence Bel-Air and The Habourside had recorded a drop of 6.1%, 8.8%, 5.8% and 3.1% in price from their respective peaks in June. Year-to-date, prices of the above four estates have grown between 5.8% (Residence Bel-Air) and 18.6% (City One Shatin), with mass residential estates seeing the strongest growth.
Mr To said, "The stimulus of the recent mortgage incentive has boosted sales of low-priced homes and given support to prices in the mass residential sector. However, if the uncertainty arising from the local political situation and trade talk hurdles should continue, we expect the impact on Hong Kong's economy will become more acute by mid-2020. That will weigh on home sales volumes and pricing, with sales volumes remaining at a level similar to Q4 in the next quarter and home prices to drop by 10% to 15% in first half of next year."
Investment: Number of transactions in 2019 is the lowest in 10 years, after a record-high 2018
Sentiment in the investment market had already begun to cool in the face of growing trade tensions in H2 2018, and the market continued to slow throughout 2019. Between January and mid-December, a total of only 194 major transactions (each with a consideration of over HK$100 million) have been recorded, compared to 430 in 2018. Meanwhile, the consideration of such transactions year-to-date totalled HK$82.1 billion, just a third of the amount recorded in 2018. With Q4 being one of the slowest quarters in history, the number of transactions concluded in 2019 was the lowest in a decade.
Throughout 2019 there was a decline in all sectors in terms of both the number of transactions and consideration. Transactions for luxury residential, which have been supported by some end-user demand, took the lion's share. Similar to the latter half of 2018, investor sentiment remained muted in the first half of 2019 as the outlook remained clouded by the trade tensions. In H2, however, the escalating social unrest and its impact on rentals has been the dominating factor that has brought the investment market nearly to a standstill. That said, the average deal size in an otherwise weak year of 2019 amounted to HK$440.2 million, which was third highest over the last 10 years, after HK$584.8 million in 2018 and HK$575.5 million in 2017.
In terms of investor profile, local investors have for the most part decided to remain on the side lines in recent months and face no urgency to sell. Meanwhile, Mainland investors, apart from a few buyers of luxury residential, have been constrained by capital controls and the devaluation of the Renminbi, and institutional funds have taken a wait-and-see approach to watch how the political situation will evolve.
Mr Tom Ko, Cushman & Wakefield's Executive Director, Capital Markets in Hong Kong, commented, "The huge drop in major deals for office and retail properties was the main reason for the record-low transaction volume this year. However, as investors have remained on the side lines for a while now, and with the business outlook in 2020 expected to deteriorate further, some landlords may be more inclined to sell in the near-term. This could create opportunities for more transactions."
Office: After rentals peaked, availability at all-time high amid negative outlook
Leasing demand in the Hong Kong office market, already weak since H2 2018 due to global uncertainties, has been further impacted in the second half of 2019 as local unrest shows no sign of abatement. Greater Central has suffered the most, with net absorption in the submarket remaining in negative territory for much of 2019 due to a steep drop in take-up by PRC firms alongside a continuing contraction and relocation by MNCs. Year-to-date, the total net absorption in Greater Central amounted to -420,587 sq ft, the worst in five years. In contrast, non-core submarkets such as Kowloon East and Hong Kong East, which have seen high quality new supply in recent quarters, benefitted from decentralization, accounting for most of the net absorption in the year. Overall, however, 2019 marked a sharp slowdown in Hong Kong's office leasing market, with total net absorption year-to-date of 444,142 sq ft, equivalent to less than half the five-year average and just 23% of that of 2018.
Weak demand alongside new supply of 2.3 million sq ft in 2019 pushed overall availability of Grade A space higher, from 7.0% as of the end of last year to 8.7% in Q4. Alongside that, availability in Greater Central has increased from 5.2% as of the end of last year to 7.8% in Q4, the highest level in 14 years.
As availability has trended upward, Grade A office rents have come under increasing pressure, falling by 4.2% year-to-date to HK$73.2 overall and erasing much of the rental growth in 2018. In Greater Central, rents have fallen for three consecutive quarters after peaking in Q4 2018 and remaining flat in Q1 2019. Rents in Greater Central have posted a year-to-date drop of 6.1% to HK$130.6 per month per sq ft in Q4, while those in Prime Central recorded the steepest drop in the year, by 7.0% year-to-date. While rentals across most other submarkets also recorded declines for the year, Hong Kong East emerged as the only submarket to see rental growth, of 2.6% year-to-date, as availability there remained relatively low.
Mr Keith Hemshall, Cushman & Wakefield's Executive Director, Head of Office Services, Hong Kong said, "The Greater Central market will be challenging for landlords in 2020. The key sources of demand in recent years -- organic expansion, co-working, and the PRC banking & finance sector -- have shrunk substantially from the second half of this year and the trend looks set to continue in 2020. In order to backfill the space vacated by tenants downsizing or exiting Central, landlords will have to offer significantly more competitive commercial terms."
Mr John Siu, Cushman & Wakefield's Managing Director, Hong Kong said, "MNCs are currently under cost pressure and this is leading to a tightening of capex budgets. Also, we expect the number of larger office relocations to shrink in 2020 due to the ongoing social unrest and economic uncertainty. Should the current situation continue, we expect Prime Central, Greater Central and Kowloon East to show the biggest drop in rents, down by between 8% and 13% in 2020, as the first two submarkets face the prospect of shrinking demand, while Kowloon East will be impacted by having the most availability."
Retail: Rents across Hong Kong fell to lowest in five years amid great disruption to business
The Hong Kong retail market started off 2019 positively as new transportation links to mainland China fueled an increase in visitor arrivals to Hong Kong. Over the first two months of the year, mainland arrivals saw the largest growth in five years, growing by 19% year-on-year, overall, and by 21% for same-day visitors. The increase in tourist arrivals, which continued through June and provided a boost to foot traffic and retail sales in some sectors such cosmetics and non-discretionary retail, kept vacancy levels low and led to a rebound in rentals across most submarkets in H1 2019. In particular, rentals in Tsimshatsui and Mongkok witnessed strong growth, benefiting from their proximity to infrastructure links to the Mainland and increasing numbers of Mainland visitors, including many day-trippers.
Since mid-2019, Hong Kong's retail market has increasingly struggled amidst the growing social unrest and resulting disruption to retailers' businesses throughout the city. Mainland tourist arrivals plummeted as the unrest escalated and in October, the number of visitors from the Mainland dropped by 45.9% year-on-year, the steepest decline ever in a single month. Retail sales have been similarly hard hit, dropping by 24.3% year-on-year in October after a drop of 18.2% year-on-year in September. The decline was led by jewelry and watches which recorded a fall in sales of 42.9% year-on-year, followed by medicines & cosmetics (down 33.5%).
The social unrest extinguished the nascent rebound in retail rents early in the year, with the rental growth witnessed across most submarkets in H1 2019 completely erased by Q3. In Q4, the decline in rentals across all submarkets has become even steeper, led by Tsimshatsui and Mongkok, where average rentals fell by 10% quarter-on-quarter as Mainland tourist levels have fallen off. Rents in Central have suffered only slightly less, falling by 9.8% quarter on quarter, while Causeway Bay -- with the most expensive high street rents in the world -- saw a quarterly drop of 8.5% in rents. Non-core areas such as Yuen Long and Tuen Mun also suffered, recording a drop of 8.6% and 5.3% from Q3 respectively. In all rents across Hong Kong have fallen to the lowest level in more than five years.
Alongside tourism, the F&B sector has also been hit hard by the frequent disruptions to business caused by the social unrest. The pressure on F&B rents worsened in Q4, led by 8.1% drop in Mongkok, a sharp reversal to the 0.9% quarterly growth in rents in the submarket in Q2.
Mr Kevin Lam, Cushman & Wakefield's Executive Director, Head of Retail Services, Hong Kong, commented, "Retail sales, particularly among businesses that rely on tourists, will face negative prospects in near term in 2020, and rentals across all the submarkets are expected to drop by double digits, led by Causeway Bay in the range of 12% to 14%. F&B rents will also drop by 5% to 12% in H1 2020, in view of F&B spending falling back to the level of 2011, particularly for Chinese restaurants. If the situation improves, however, and the resulting calm leads to a rebound in local consumption, that may encourage the return of tourists. The upcoming Christmas and Chinese New Year holidays will therefore be a crucial time for retailers to see if customer spending can return to levels prior to the unrest. Going forward, retailers will be extremely conservative in expanding, if not solely focusing on survival, except for those which are better positioned to take advantage of the current market correction, such as the education and sports/athleisure sectors."
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 51,000 employees in approximately 400 offices and 70 countries. Across Greater China, there are 22 offices servicing the local market. The company won four of the top awards in the Euromoney Survey 2017 & 2018 in the categories of Overall, Agency Letting/Sales, Valuation and Research in China. In 2018, the firm had revenue of $8.2 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com.hk or follow us on LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china)