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News Release

Hong Kong

Jones Lang LaSalle: Weak Sentiment in Residential Market Continues while Rents in Retail and Office Markets Expect Moderate Growth in the Second Half of 2013

Rising Concerns over Possible Interest Rate Hikes Likely to Weigh on All Property Sectors

Hong Kong, 11 July 2013 – Market activity in the residential property sector will remain slow on the back of restrictive measures coupled with rising concerns over a potential interest rate hikes. Meanwhile, rents in the leasing market in both retail and office segments are expected to record moderate growth in the second half of 2013, according to Jones Lang LaSalle Hong Kong in its Mid-Year Property Review 2013 released today.

Office Market
Leasing activity in the overall Grade A office market remained slow with overall net absorption amounting to only 368,800 sq ft (net) in the first half of 2013; down from 1.1 million sq ft (net) in 1H12 and 511,000 sq ft in 2H12. All submarkets recorded positive net take-up in 2Q13 with the exception of Tsimshatsui, which saw tenants vacate a number of properties due to pressure from higher rents. In Central, cost considerations continued to weigh on tenants, resulting in demand for office space in lower-end Grade A office buildings.

The sale and redevelopment of older office buildings helped boost demand in submarkets outside of Central. Hysan Place and 28 Hennessy Road, for example, were able to benefit from the announced redevelopment of Sunning Plaza, leading to a significant increase in net take-up in the Wanchai/Causeway Bay submarket in 2Q13. Meanwhile, the availability of modern cost-effective office space in Hong Kong East and Kowloon East continued to draw strong interest from relocating tenants though fewer options were available in Hong Kong East owing to the low vacancy environment.

The Finance, Insurance, Real Estate and Business Services (FIREBS) sector remained as a key driver of leasing demand in 1H13. Non-traditional occupiers, including government and clinics, also made a significant contribution, with the government taking up a total lettable area of 45,300 sq ft (gross) at KITEC in Kowloon East. Leasing activity, however, continued to be dominated by smaller requirements with lettable areas ranging from 4,000 to 6,000 sq ft.

The overall vacancy rate ended 2Q13 at 3.4%, tightening from 3.8% at end 2012. Despite a pick-up in net take-up in 2Q13, Central remained the submarket with the highest vacancy rate (4.5%). Buoyed by demand from the consumer products industry, the vacancy rate in Hong Kong East continued to edge downwards, making it the submarket with the lowest vacancy rate (1.2%).

Underpinned by growth in Central and Wanchai/Causeway Bay, rents in the overall Grade A office market recorded a growth of 1.7% in 1H13. Rents in Central recorded growth for the first time since 3Q11, edging up by a total of 1.5% q-o-q in 2Q13 and 0.2% in 1H13, driven primarily by rent increases in the mid-end of the Grade A office market.

Ben Dickinson, Head of Markets at Jones Lang LaSalle Hong Kong, remarked, “The latest indicators suggest that Hong Kong’s economy will continue to show modest improvement in the second half of 2013. Coupled low vacancy rates and limited supply, we expect the leasing market to experience moderate rental growth in 2H13, with most submarkets growing in the range of 5% to 15% in 2013 and with non-core sub-markets to outperform in light of cost considerations and tight vacancy.”

Retail Market
The robust growth in mainland tourist arrivals continued to lend support to Hong Kong’s retail property sector. Through the first five months of 2013, the total number of mainland visitor arrivals into Hong Kong increased by almost 20% y-o-y, contributing to about 74% of total tourist arrivals. Among them, visitors travelling under the Individual Visitor Scheme (IVS) were up 22% y-o-y, accounting for about 67% of the tourist arrivals from mainland China. A growing number of visitors from mainland China are opting for day-trips to new and emerging shopping districts closer to the border, leading to a 23.7% y-o-y increase in the number of same-day visitors from China for the first five months of 2013.

Supported by the strong growth of mainland tourists, retail sales in Hong Kong maintained strong momentum with y-o-y growth of 15% in 1H13 compared to 9.8% y-o-y in the whole year of 2012. Boosted by the correction in gold prices, there was a notable surge in sales of jewellery and watches, growing by 30.7% y-o-y in the first five months of 2013. Driven by mainland Chinese tourists’ growing interest in mid-priced luxury products and medicine and cosmetics, retail sales of medicine and cosmetics also registered steady growth of 12.7% y-o-y in the period from January to May.

In spite of the persistent growth in retail demand, high rents continued to pose challenges to cost-sensitive retailers, including foreign brands, who are increasingly active in seeking expansion and opening new stores in secondary non-prime locations such as Tuen Mun, Tsuen Wan, Ma On Shan and Shatin.

Nevertheless, demand for retail premises in prime shopping locations remained strong with support from new market entrants and international retailers. With limited retail space in the supply pipeline, rents rose to record-high levels. Rents in prime shopping centres and high street shops grew by 2.3% and 2.5%, respectively, in 1H13. Growing interest in secondary streets and non-prime districts has also pushed up rents in those areas, resulting in a narrowing rental gap between traditional core and non-core shopping districts.

The Kai Tak Cruise Terminal, which commenced operations in June with retail space of 60,278 sq ft, is one of the few notable retail developments available in the market this year. Midtown (217,000 sq ft) in Causeway Bay will be added to the supply pipeline later this year as well.

Tom Gaffney, Head of Retail at Jones Lang LaSalle Hong Kong, said, “The summer holidays will provide a further boost to domestic consumption and will bring in more tourists in 3Q13. In anticipation of double-digit retail sales growth this year, we expect retail rents to rise at a moderate pace of about 5% for the whole of 2013. Meanwhile, the spending patterns of mainland visitors will continue to broaden and create expansion opportunities for mid-end retailers.”

Residential Market
Market sentiment in the residential sector slumped following the latest round of restrictive policy measures announced in February.  Buying interest was weak, with overall residential transactions dropping to a monthly average of 4,600 transactions in 1H13 compared to a monthly average of 6,800 in 2012 and a long-term monthly average of 8,000.

Sales volumes in the luxury housing market also plummeted in 1H13, reflecting the weak market sentiment. Properties selling in the HKD 30-50 million range recorded the greatest decline, falling by close to 70% y-o-y, largely due to the restrictive measures further lowering the affordability of these units for prospective buyers looking to upgrade.
With the Residential Properties (First-hand Sales) Ordinance coming into full effect in late April, the primary sales market was quiet in 2Q13 as developers delayed the launch of new projects. Of the few projects launched since the new legislation was implemented less than 50% of the new units were sold in general.
Affected by the restrictive policy measures, home prices in both the mass residential and luxury segments retreated marginally in 1H13. Capital values in the housing market also contracted slightly, edging down by 0.7% and 0.8%, respectively, in the mass residential and luxury segments. In the leasing market, luxury rents continued to consolidate in 1H13 due to subdued leasing activity by expatriates with lower accommodations budgets.
Supply in the residential sector remained limited. An estimated 13,100 units are slated for completion in 2013, still below the 10-year average of 14,600 units per year from 2003 to 2012. Further down the pipeline, an estimated 14,700 units are slated for completion in both 2014 and 2015 before rising to 18,000 units in 2016.
Joseph Tsang, Managing Director of Jones Lang LaSalle Hong Kong, said, “We expect activity to remain subdued in the residential market while the government’s restrictive measures remain in place. Moreover, in view of rising concerns over a potential interest rate hike, buyers will become more cautious and transaction volumes are expected to remain at low levels over the next twelve months. As purchasing demand continues to soften, capital values will likely see downward adjustments. Nonetheless, a collapse in prices is unlikely as long as the low interest rate environment remains intact.”
Investment Market
The investment market plummeted after government doubled stamp duty (DSD) and began levying stamp duty on all sub-sales of non-residential properties in February. The total value of investment across the four key property sectors amounted to HKD 39.0 billion in 1H13, down from HKD 52.3 billion in 1H12 and HKD 53.7 billion in 2H12. A total of 131 transactions were registered for properties valued at over HKD 100 million (excluding land auctions). The focus of investment was largely on office properties (50%), followed by retail (20%), residential (17% of total considerations) and industrial (13%) properties.
Capital values in the commercial property markets continued to trend higher albeit on the back of thin transaction volumes. Investment activity was largely driven by end-user demand. New supply in decentralised submarkets lent support to Grade A office prices, while those in core areas stayed firm. In the retail sector, the newly announced restrictive measures resulted in capital values of high street shops retreating by 0.5% q-o-q in 2Q13. The strongest growth was recorded in the industrial market, and industrial property prices continued to be supported by the opportunities in redevelopment and refurbishment in areas such as Kowloon East.
“We expect the demand to remain weak under the current restrictive measures. Over the short term, however, capital values are unlikely to collapse should the low interest rate environment remain and continue to provide support for asset prices. Nevertheless, the prospects of a potential interest rate hike will likely dampen market sentiment. Against this backdrop, we expect investment volumes to remain low across all property sectors, and investor interest, if any, will continue to gravitate towards non-core assets.” Tsang commented.
Industrial Market
The external trading sector remained volatile, with the total value of imports and exports growing by 4.8% y-o-y and 3.8% y-o-y, respectively, in January-May. Coupled with low vacancy rates and high asking rents, leasing activity slowed in 2Q13. The slump in investment activity arising from the latest round of restrictive measures led to a reduction in the redevelopment and refurbishing of older industrial properties, resulting in slower leasing demand as fewer tenants were forced into the market.
Nonetheless, industrial property rents recorded strong growth across all asset classes. Warehouse rents, for example, have recorded steady growth as vacancy rates tightened further in 1H13. Warehouse rents edged up 5.2% in 1H13, standing at an average of HKD 9.8 per sq ft per month at the end of June, a record high for the market. The strongest rental growth was recorded in the Hong Kong Island and Kowloon submarkets where the redevelopment and refurbishment of older buildings has reduced tenant options.
Denis Ma, Local Director, Greater Pearl River Delta at Jones Lang LaSalle, said, “We expect demand for warehousing space to remain intact over the next 12 months despite the current volatility in the external trade markets. With vacancy rates at record low levels, rents are expected to continue to trend higher, with a projected growth range of 5-10% in 2013.”