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News Release

Hong Kong

Jones Lang LaSalle: Retail Outperforms All Property Sectors in 2012

Despite being already at record high levels, capital values across all property sectors are expected to grow by a further 5-10% in 2013

HONG KONG, 4 December 2012 — Capital values in Hong Kong’s property market continued to trend higher in 2012 despite uncertainties in the global economy and yet more austerity measures being implemented in the local residential property market. Moreover, despite already being at record high levels, capital values are expected to grow by a further 5-10% across all property sectors in 2013, according to Jones Lang LaSalle Hong Kong in its Year-End Property Review 2012 today.

Office Market
The Grade A office market continued to expand at an aggregate level in 2012 with overall net absorption in the first 11 months amounting to 1.3 million sq ft (net). Demand, however, was not evenly distributed across the market. The restructuring of the banking sector in Central saw the demand for premium offices drop sharply, resulting in negative net absorption of around 311,000 sq ft through the first 11 months of 2012, making it the weakest office leasing market this year.
Led by tenant decentralisation, the leasing market outside of Central continued to experience strong growth. Kowloon East remained as the most popular sub-market for cost-saving relocation and was a key contributor to overall net absorption in the market. Demand for office space was also supported by the redevelopment of older buildings, which forced tenants into the leasing market.
The growth of the broader financial services sector helped offset some of the impact arising from the downsizing in the banking sector. Requirements from these tenants, however, were typically smaller; especially in Central. Merchandising, sourcing and consumer product tenants were among the few expanding in 2012. Avery Dennison, for example, took up 2 floors with total lettable area of 71,000 sq ft in Octa Tower this March and Giorgio Armani, took up 2 floors with a lettable area of 33,380 sq ft in Kerry Centre in March.
The contraction of the occupier market in Central led to the vacancy rate climbing from 3.6% in 2011 to 4.9% in 2012, the highest among the five major office sub-markets. In contrast, the vacancy rate in Kowloon East declined sharply, which was supported by an active investment sales market dominated by owner-occupier buyers. As at end of November, the vacancy rate in the overall market had tightened from 4.2% in 2011 to 3.6%.

Rents steadily declined throughout 2012 with overall rents retreating by 3.5% through the first 11 months of the year. The correction in the overall market, however, was entirely attributed to lowering rents in Central. In contrast, rental levels in sub-markets outside of Central continued to climb higher on the back of sustained demand and low vacancy environment, with rents in Kownloon East posting the strongest growth (11.1%) in 2012.
Ben Dickinson, Head of Markets at Jones Lang LaSalle Hong Kong, remarked, “The latest indicators suggest that the economic situation in 2013 will stabilise. Coupled with the release of QE3, we expect leasing demand to gradually pick up over the next 12-months.  Although about 1.5 million sq ft of new supply is expected to reach the market in 2013, most of this is destined for the strata-titled sales market, providing limited leveraging opportunities for larger corporate occupiers. Therefore, we do not expect new supply to have a significant impact on the performance of the rental market and we estimate a broad based recovery in the rental market by 2H13. Supported by a low vacancy environment, we expect Grade A office rents grow by about 5% in 2013.”

Retail Market
The sustained growth in Mainland tourist arrivals continued to provide support to Hong Kong’s retail property sector. Through the first 10 months of 2012, the total number of Mainland visitor arrivals into Hong Kong was up by 23.8% y-o-y, accounting for 71.7% of all visitor arrivals (28.4 million visitor arrivals). In comparison, the total number of visitor arrivals grew by 15.8% y-o-y over the same period. Jones Lang LaSalle estimates that tourism contributed to over 30% of total retail sales in 1H12 with visitors from China accounting for about 85% of the total visitor spending on shopping.
Retail sales increased by 9.9% y-o-y in the first 10 months of 2012, a noticeable drop from the record 24.9% growth achieved in 2011.The slowdown in retail sales growth was largely attributed to weaker consumption, particularly on luxury items, arising partly from a slowdown in the domestic and Mainland economies and the changing profile of Mainland shoppers. In general, visitors were more inclined to spend more on less expensive luxury products and mid-priced products such as cosmetics. As a result, luxury items recorded the sharpest decline in growth with the sales of jewellery and watches contracting in recent months. Retail sales of Jewellery and watches were up by just 6.6% y-o-y through the first 10 months of 2012, a marked decline from the 46.7% growth achieved in 2011.

The demand for retailing premises in prime shopping locations remained strong despite rents reaching new record-high levels. In many instances, retailers were still willing to pay premium rents to secure prime retailing premises with high customer exposure. Demand from new entrants and international retailers continued to drive rents in prime shopping centres and high street shops higher,  growing by 12.5% and 14.5%, respectively, in 2012.
In the face of high rentals, an increasing number of retailers opted to expand and open new stores in non-core areas and secondary streets in traditional prime shopping areas. As a result of this trend, rents in non-core areas outperformed in 2012, narrowing the rental gap between core and non-core locations.

Supply of retail space remains tight with V City in Tuen Mun (269,000 sq ft) and Midtown at Tang Lung Street (200,000 sq ft) in Causeway Bay being the only notable retailing developments due for completion over the next 12 months.
Tom Gaffney, Head of Retail at Jones Lang LaSalle Hong Kong, said, “Looking ahead, the supply and demand imbalances in the market will continue to drive up rents and against this background, we expect that more retailers to look into opportunities in secondary streets in traditional prime retailing areas and non-core area locations. In spite of the high rental environment, we are still optimistic about the prospects of the retail sector as foreign retailers still view Hong Kong as being the perfect springboard to enter the Mainland China market while Chinese retailers are increasingly using Hong Kong as their springboard to enter international markets.”

Residential Market
Market sentiment in the residential sector was largely positive throughout 2012, with monthly transaction volumes slowly recovering during the course of the year to be largely on par with 2011 levels (about 7,000 transactions per month). The buyer favourable interest rate environment and narrow supply situation saw overall capital values in the mass residential market soar by 20.3% y-o-y through the first 11-months of the year. Capital values in the luxury residential market, on the other hand, grew by just 5.0% y-o-y, over the same period.
The government’s latest round of austerity measures for the residential market announced in late October, including a more stringent Special Stamp Duty (SSD) and Buyer’s Stamp Duty (BSD), has seen market sentiment slump.  Anecdotal evidence has suggested that sales volumes have dropped sharply since the new measures have come into effect. Mass residential prices, however, appear to be holding up, edging down marginally by less than 1% in October and November combined.
Though transaction volumes were able to pick-up noticeably in the mass residential market during the course of the year, volumes in the luxury segment of the market were lower in 2012 than in 2011. Properties selling in the range of  HKD 20-30 million recorded the sharpest drop, with sales volumes down by about 28% y-o-y through the first 11 months of the year; largely as a result of the higher costs involved under the current mortgage lending policy. At the same time, stock available for sale remained limited as owners continued to hold onto their properties amid the low interest rate environment. Moreover, owners were less willing to sell because of the potential inability to re-enter the market on the back of the higher entry costs.
Purchasing demand in the primary sales market was also affected by the latest round of austerity measures. The only project launched since the new measures came into effect was The Reach in Yuen Long. Only 16% sales of the 2,580 units have been sold thus far, significantly lower than for similar projects launched earlier in the year.
Supply in the residential sector remained limited, a situation that is not expected to change for another 2 to 3 years. An estimated 15,500 units are expected to be completed in 2013, still below the 10-year average of 16,700 units per year.  Further down the pipeline, 13,600 units are expected to be completed in both 2014 and 2015 before rising to 17,800 units in 2016.
Joseph Tsang, Managing Director of Jones Lang LaSalle Hong Kong, said, “We expect thin sales volume in the residential market while the government’s austerity measures remain in place. However, the effect of these measures on prices will likely be limited until interest rates are increased substantially. Before that, demand from end-users is expected to remain intact and continue to lend support to the residential prices.” Joseph added, “Nonetheless, there are still risks ahead, mainly from global economic uncertainties and the potential for yet more policy measures from the government. We expect that an improved economy from 2013 onwards will likely support leasing demand and rental growth for leasing properties.”
Investment Market
The investment market continued to perform strongly in 2012 despite capital values entering the year at elevated levels. The total value of investment across the four key property sectors amounted to HKD 91.7 billion through the first 11 months of 2012, about 4% higher than for the whole of 2011. Capital values continued to trend higher across the board in 2012 with the strongest growth recorded in the retail sector, which was largely achieved in the first half of 2012 before retail sales growth began to slow.
From January to November, a total of 310 transactions were registered for properties at over HKD 100 million (excluding land auctions). The investment focus was largely on retail (38% of total considerations) and residential (32%), followed by office (22%) and industrial (8%).
The latest round of austerity measures imposed on the residential property market has seen investors shift their attention to the commercial property markets. But with capital values in traditional core-area markets close/at record high levels, investors turned to peripheral locations with higher growth potential. In the retail sector, escalating prices saw investors quickly shift their focus to secondary streets in prime locations such as Wellington Street in Central, Hysan Avenue and Pak Sha Road in Causeway Bay, and also retailing premises in decentralised locations such as Tsuen Wan, Tuen Mun and Shatin. In the office market, investor interest has been drawn towards emerging areas in Kownloon while redevelopment and refurbishment opportunities in industrial areas such as Kowloon East and Kwai Chung have lent support to the growing interest in industrial property market. Industrial investment volumes were also buoyed by the launch of a number of new ‘flex properties’ onto the sales market, including One Midtown and Billion Square in Tsuen Wan and Fun Tower in Kwun Tong.

“Looking into 2013, a low interest rate environment is expected to continue, which lends support to asset prices. The release of QE3 will also lead to a pick-up in capital flows into Hong Kong. Against this backdrop, we expect yields across all asset classes to remain under downward pressure.” Tsang commented. “With capital values now at record high levels, policy risks remain, especially in the residential sector. The government’s unwillingness to rule out imposing measures on the city’s commercial sector is also a concern. In addition, there are signs that inflation may be on the rise. Together with the interest rate situation, we expect negative interest rates to persist in 2013 and capital values to grow by 5-10% across the board.”

Industrial Market
Improvement in the external trading sector complimented by relatively resilient growth in the local retailing sector continued to support the demand for warehousing space. Leasing demand was also bolstered by the redevelopment and refurbishment of older industrial properties to non-industrial uses.
Industrial property rents have been supported by a low vacancy environment across all industrial asset classes. Warehouse rents, for example, have steadily accelerated as vacancy rates tightened during the course of year.  With overall vacancy in the warehouse market estimated to have now fallen to below 3%, warehouse rents were standing at an average of HKD 9.3 per sq ft per month at the end of November, a record high for the market.
Marcos Chan, Head of Research, Greater Pearl River Delta at Jones Lang LaSalle, said, “Growth in both the external trading sector and the local retailing sector will continue to drive up demand in the industrial market. But with rents already at record high levels and tenants continuing to adopt a pragmatic approach towards expansion, we do not expect a significant surge of demand in 2013. Moreover, the commercial warehouse market has now entered a window of limited supply with no new supply expected to be completed before 2014. Against this backdrop, we expect rents to continue to rise at a moderate pace up to 5% in 2013.” 
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Click here for full press release
Click here for Summary of Hong Kong Property Market Data (December 2012)