CBRE released their Hong Kong 2020 Q3 MarketView this week, giving a stark assessment of Hong Kong’s commercial real estate market.
The report described 2020 as one of the most challenging years in Hong Kong’s history, with the commercial real estate sector being heavily impacted by both political unrest and the COVID-19 pandemic.
Vacancy rates in both office and retail have continued to climb and rents have continued to fall. The industrial sectors also continued to soften with commercial property transactions also continuing a downward trend. Despite all the negative news CBRE sees some light at the end of the tunnel with the expectation that lower prices and cost of borrowing will spur investor interest in the sector, particularly from Mainland investors.
Office rents under pressure
In addition to higher vacancy rates pushing down rents, investment volume in the office sector fell to an 11-year low this year.
Office leasing momentum registered a slight quarter-on-quarter improvement in Q3 2020, with gross leasing activity increasing by 25% q-o-q. However, this represented just half of the quarterly average over the past five years.
Q3 recorded a negative net absorption rate of -673,500 sq. ft. pushing up overall vacancy to 9.6%. The largest increase in vacancy occurred in the Greater Central area, Hong Kong’s core submarket, which reported a rise of 2.1-ppt to 7.3%, with net absorption recording a historical record low of -452,700 sq. ft.
The emerging business district of Kowloon East was the only submarket to end the quarter with positive net absorption, gaining around 44,700 sq. ft.
Overall rents in Asia’s priciest office market fell by 3.9% q-o-q following declines of 7.0% q-o-q in Q2 2020 and 3.5% q-o-q in Q1 2020. Central recorded the sharpest decline, with rents falling by 4.8% q-o-q, bringing the year-to-date drop to 14.8%.
Commenting on the figures, Alan Lok, Executive Director, Advisory & Transaction Services – Office Services, CBRE, said, “Corporates are still highly cautious about making real estate decisions and cost-saving continues to be their number one priority.”
Retail decline shows signs of slowing
On the retail front, despite Hong Kong experiencing a third wave of COVID-19 cases in Q3 2020, the situation seems to be improving for Hong Kong’s beaten down retailers. While total retail sales fell by 18.5% year-on-year in July and August, this compares somewhat favourably to a precipitous 31.4% drop for Q2 2020. However, the report cautions that while this marked the fifth consecutive month of a softer year-on-year decline, this was partly due to the low base established during the widespread political unrest in the second half of 2019.
Continuing the trend of pandemic-driven downsizing a number of international fashion retailers closed stores in the quarter, with at least 11 premises returned. High-street shop vacancy in Hong Kong’s four core districts climbed 4.8-ppt to reach 18.3% at end-September.
The decline in high-street shop rents accelerated from 5.5% q-o-q in Q2 2020 to 5.7% q-o-q in Q3 2020. Shopping mall rents however remained stable as landlords opted to support retailers via marketing and promotional measures.
Lawrence Wan, Senior Director, Advisory & Transaction Services – Retail, CBRE, said, “With many social-distancing measures remaining in place, retailers continued to adopt a cautious approach. Significant rental drops since last year, however, encouraged some local brands to explore leasing opportunities at low costs that had not existed for many years. Should the local pandemic remain contained, we expect to see a slight rebound in leasing activity in Q4.”
Industrial also softening
The city’s total merchandise trade fell by 3.6% y-o-y in July and August combined, an improvement on the 6.6% y-o-y decline registered in Q2 2020. Exports to North America and the EU were particularly badly impacted, falling by 17.8% and 20.9% respectively, compared to a drop of just 0.6% for Asia.
As a result warehouse vacancy edged up 0.3-ppt to 4.2% at end-September, primarily in ramp-access buildings. The only sectors to show positive signs were data centres and cold storage operators driven by strong demand from tech and telecom operators as well as food and online retailers.
Consequentially warehouse rents fell by 2.4% q-o-q in Q3 2020 bringing the total drop so far this n the year to 6.7%.
Looking toward the remainder of the year, Samuel Lai, Senior Director, Advisory & Transaction Services – Industrial, CBRE, said, “Given the low chance of a full containment of COVID-19 in most of the western economies in the foreseeable future, global trade demand is expected to remain soft in the months to come. Logistics operators will likely stay highly cautious in Q4. Warehouse vacancy will edge up further in Q4.”
Fewer commercial real estate deals in Q3
The report also saw a fall in commercial real estate investment volumes in Q3, with the lowest quarterly total since Q1 2009 of just HKD4.4bn. Year-to-date completed deals are valued at HKD18bn. This is just 26% of the HKD68.8bn of deals booked in 2019 and we are already three-quarters of the way through the year.
CBRE commented on the fact that developers have continued to offload non-core retail properties, including sold shopping arcades sold off by Wheelock and Chinachem for HKD200m and HKD457m respectively.
A glimmer of hope offered in the report was the fact that Mainland Chinese investors purchased HKD2.2bn-worth of assets in Q3 2020, having been quiet for the past few quarters.
Reeves Yan, Executive Director, Capital Markets, CBRE, commented, “The commercial property market remains very soft in term of transaction volume, despite the strong inflow of capital in recent months. Geopolitical and public health uncertainties will likely remain the major concerns for investors in Q4 and the chance of seeing a noticeable rebound in investment volume before the end of the year is low. However, the low cost of funding and the limited new supply across property sectors, backed by discounted prices, will ensure investors’ continued interest in Hong Kong investment opportunities”