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News Release

Hong Kong

Jones Lang LaSalle: Downside Risks from Restrictive Measures and Potential Interest Rate Hike to Continue to Weigh on Residential Market in 2014

Capital values of commercial properties expected to remain largely stable in 2014


hong kong, 4 December 2013 – Rising concerns over rising interest rates arising from the tapering of US Federal Reserve’s quantitative easing program, along with the likelihood of local austerity measures remaining in place, will continue to weigh on the residential market in 2014. In the meantime, capital values of commercial properties are expected to remain largely stable in 2014 after reaching all-time highs in 2013, according to Jones Lang LaSalle Hong Kong in its Year-end Property Review 2013 published today.

Office Market

Leasing activity in the overall Grade A office market remained subdued throughout 2013, with overall net absorption in the first 11 months amounting to 263,200 sq ft (net), a significant drop from 1.6 million sq ft (net) in 2012. Demand visibility was still weak, with new lettings largely bolstered by smaller-sized office requirements (less than 5,000 sq ft), while tenants with larger floor plate needs opted for decentralised locations such as Kowloon East on cost-saving considerations.

The leasing performance in major submarkets varied, with Wanchai/Causeway Bay being the only major core-area submarket that recorded a positive net take-up in the first 11 months of 2013. The leasing market in Central started to show signs of stabilisation with net absorption down by just 3,300 sq ft (net) for the first 11 months of 2013, led by improvements at the top-end of the market where net absorption rose to 100,300 sq ft (net) for the first 11 months this year from 84,800 sq ft (net) in 2012. Tenant affordability improved noticeably, with more tenants willing to renew leases at higher rents or upgrade their office requirements.

The finance, insurance, real estate and business services (FIREBS) sector remained the most active driver of leasing demand despite the banking industry continuing to undergo ‘rightsizing’. Some big Western banks sought to give up extra space over the year, while mid-sized and small-sized banks were seen taking the opportunity to further expand, with China Minsheng Bank expanding into the Bank of America Tower and Cosco Tower, as well as Bank of New York Mellon expanding in Three Pacific Place.

The vacancy rate climbed across most major submarkets, except Wanchai/Causeway Bay. As a result, the overall vacancy rate in 4Q13 reached its highest level since 2012. In Central, while the occupancy rate increased at the top-end of the market benefitting from active leasing at the CCB Tower, the overall vacancy rate in Central still rose to 4.6% by the end of November. Vacancy was, however, concentrated in only a handful of mid-end and lower-end buildings. Kowloon East posted the highest vacancy rate (8.4%) among all submarkets on the back of the completion of new strata-titled buildings that included YHC Tower and 181 Hoi Bun Road, to name a few. 

Rents saw a steady recovery after contracting last year, with overall rents posting 1.2% growth through the first 11 months of 2013. Rents in Central appeared to have troughed in 1Q13 after correcting by 17% since the middle of 2011, edging up by slightly through the middle of the year. The recovery, however, was short-lived, with rents once again edging downward in 4Q13, bringing growth in the first 11 months of 2013 back down into negative territory. However, compared to the 11.1% drop in 2012, the decline in rents in Central has moderated significantly to only 0.7% in the first 11 months of 2013. Meanwhile, rents in Tsimshatsui contracted for the first time in three years because of the increasing vacancy rates in a handful of buildings. In Kowloon East, rental growth also slowed on the back of rising vacancy brought about by some owners of newly completed strata-titled buildings shifting vacant units from the sales to the leasing market, and hereafter softening their asking rents as well.

Ben Dickinson, Head of Markets at Jones Lang LaSalle Hong Kong, remarked, “We expect leasing demand to recover in 2014 amid improvements in the global economy, which will lead to gradual rental growth across the board. Although about 894,000 sq ft of new commercial Grade A offices are expected to reach the market in 2014, most of these are destined for the strata-titled sales or will be located in non-traditional business areas, and thus provide limited leveraging opportunities for larger corporate occupiers. Therefore, we do not expect new supply to have a significant impact on rents in the core submarkets. Underpinned by improved demand, low vacancy rates, tight supply over a short term and increasing tenant affordability, we expect rents to trend higher by about 5% in 2014.”

Hong Kong Prime Office Indicator – % Change

Submarket

Capital Values

(Jan–Nov 2013)

Rents

(Jan–Nov 2013)

2014 Rental Forecast

Central

p2.5%

q0.7%

p5–10%

Wanchai/Causeway Bay

p2.8%

p1.3%

p0–5%

Hong Kong East

p4.4%

p5.8%

p0–5%

Tsimshatsui

p3.6%

q0.2%

p0–5%

Kowloon East

p12.0%

p8.5%

p5–10%

Overall

p3.6%

p1.2%

p0–5%

Retail Market

The steady growth in mainland China tourist arrivals continued to lend support to Hong Kong’s retail property sector. Through the first ten months of 2013, the total number of mainland China visitor arrivals into Hong Kong increased by 18.0% y-o-y, contributing to about 75% of all visitor arrivals (44.5 million). By comparison, the total number of visitor arrivals grew by 12.3% y-o-y over the same period. Among the mainland China visitors, about 67% travelled under the individual visitor scheme (IVS), and an increasing number were inclined to take day trips to new and emerging shopping districts closer to the border, resulting in 20.6% y-o-y growth in same-day visitors from China from January to October 2013.

Retail sales fluctuated in 2013; registering 15.0% y-o-y growth in 1H13—which arose from strong sales in jewellery and watches—before moderating to 7.2% y-o-y in July-October, which was largely attributable to the cooling down in gold purchases. Meanwhile, retail sales in department stores witnessed robust growth of 20.0% y-o-y through the first ten months of the year, a notable increase from the 9.7% recorded in 2012, benefitting from mainland China visitors’ shift in demand toward daily necessities, aggressive promotions by stores and opening of new branches.  

Leasing demand for retail premises in prime shopping locations remained largely intact in spite of the slowdown in retail sales growth. Coupled with a limited supply pipeline, rents continued to edge higher, with rents in prime shopping centres and high street shops going up by 4.7% and 4.1%, respectively in the first 11 months of 2013.

Under the continued pressure of exorbitant rents, an increasing number of retailers turned more cautious and conservative in bidding up rents. More and more retailers were seen looking to expand and open new stores in noncore locations such as prime shopping centres in decentralised locations, leading to a narrowing rental gap between traditional core and noncore shopping districts. Other strategies used by retailers to circumvent high rents included the opening of pop-up stores and virtual stores.

Tom Gaffney, Head of Retail at Jones Lang LaSalle Hong Kong, said, “The upcoming Christmas and New Year holidays will bring in more tourists and further boost consumer spending by end of this year. Looking ahead, retail sales in 2014 are projected to grow at trend levels with the continued support of mainland China shoppers, especially shoppers from lower-tier cities opting for mid-priced products and affordable luxury. This shift in spending patterns will continue to broaden and benefit mid-end retailers. Against this background, we anticipate retail rents to grow at a moderate pace of about 2–4% for the whole of 2014.”

Hong Kong Prime Retail Indicator – % Change

Sector

Capital Values

(Jan–Nov 2013)

Rents

(Jan–Nov 2013)

2014 Rental Forecast

High Street Shops

p1.1%

p4.1%

p0-5%

Prime Shopping Centres

N/A

p4.7%

p0-5%


Residential Market

Market sentiment in the residential sector was generally weak during the course of the year, with the government’s restrictive measures continuing to create headwinds in the market. Residential transactions slumped 38%, from a monthly average of 6,800 in 2012 to 4,200 in the first eleven months of 2013, which was even lower than the monthly average of 4,700 during the SARS period (March to May 2003) and accounted for only 51% of the long-term monthly average of 8,200 (January 1996 to December 2012).

On the back of the government’s cooling measures, which resulted in weaker buyer interest and lowered affordability for prospective buyers, both sales volumes and transactions in the luxury housing market recorded a marked slowdown, with properties selling in the HKD 30–50 million range suffering the greatest decline, plunging by over 60% for the first 11 months of this year compared to the whole of 2012.

The primary sales market picked up momentum in 2H13 after developers gradually came to terms with the Residential Properties (First-hand Sales) Ordinance, which was enacted in April. However, with the prevailing sluggish market sentiment, developers adopted more conservative pricing strategies and offered more incentives to lure potential buyers. As a result, new launches of premises such as The Cullinan and The Austin received strong market response, although prospective buyers were also seen deferring their purchasing decisions until there were substantial price discounts in the secondary market.

Ultimately, the discounting in the primary sales market led to some vendors in the secondary market lowering their asking prices. As a result, capital values in the housing market retreated by 2.6% and 1.9% in the mass residential and luxury segments, respectively, for the first 11 months of this year. In the luxury segment of the leasing market, demand from the nonfinancial sectors and increased cases of tenants trading down the market because of cuts to housing budgets exerted pressure on rents, leading to a 3.3% decline in luxury rents for the first 11 months this year.

Supply in the residential sector remains limited. An estimated 16,800 units are slated for completion in 2014, slightly more than the ten-year average of 14,600 units, but still far below the long-term average of 27,000 per year from 1990 to 2003. Looking further ahead, an estimated 15, 400 units are scheduled for completion in 2015 before rising to 18,000 units by end-2016.

Joseph Tsang, Managing Director of Jones Lang LaSalle Hong Kong, said, “We expect sales activity to remain weak, given the downside risks from looming interest rate hikes and the potential for yet more policy measures from the government next year. Therefore, capital values in the residential sector will remain under pressure and continue with mild corrections.” Tsang added, “Nonetheless, we do not anticipate a free fall or collapse in home prices, as long as the prolonged low interest rate environment and tight supply situation remain. We believe buying momentum will stay at current levels in 2014.”

Hong Kong Prime Residential Indicator – % Change

Sector

Capital Values

(Jan–Nov 2013)

Rents

(Jan–Nov 2013)

2014 Rental Forecast

Luxury

q1.9%

q3.3%

q05%

Mass

q2.6%

N/A

N/A

 

Industrial Market

The external trading sector remained volatile in 2013, with the total value of imports and exports growing by 3.9% y-o-y and 3.8% y-o-y, respectively in the first ten months of this year. Coupled with squeezed profit margins and record-high rents, third-party logistics (3PL) operators were generally cautious toward expansion, leading to a sluggish leasing market in 2013. However, leasing demand did gain some support from the refurbishment and redevelopment of older buildings in the industrial sector, as well as the sustained domestic demand from the retail sector.

Industrial property rents have been underpinned by a low vacancy environment with limited new supply. Warehouse rents, for instance, have steadily accelerated as vacancy rates tightened during the course of the year. With overall vacancy in the warehouse market estimated to have fallen below 3%, warehouse rents were standing at an average of HKD 10.2 per sq ft per month at end-November, a record high for the market. However, rents for I/O properties saw decelerated growth because of the competition from newly redeveloped and refurbished industrial properties being converted to office use.

Ricky Lau, National Director and Head of Industrial at Jones Lang LaSalle Hong Kong, said, “We expect demand for warehousing space to remain modest under the cautious expansion plan by 3PLs amid the challenging external trading sector. Coupled with the absence of new supply in the near future, rents are projected to continue to rise at a moderate pace of up to 5% in 2014.”

Hong Kong Warehouse Indicator – % Change

Sector

Capital Values

(Jan–Nov 2013)

Rents

(Jan–Nov 2013)

2014 Rental Forecast

Warehouse

p11.8%

p9.3%

p0–5%

Flatted Factories

p16.7%

p7.5%

p0–5%

I/Os

p12.3%

p5.9%

p0–5%


Investment Market

The investment market remained subdued in 2013 after the government increased the stamp duty charges across all property sectors in February. The total value of investment across the four key property sectors amounted to HKD 50.0 billion through the first 11 months of 2013, down by over 50% compared to the whole of 2012. However, capital values held relatively firm, with the strongest growth recorded in industrial markets bolstered by investor interest in the refurbishment and redevelopment of older industrial properties.

From January to November, a total of 179 transactions were registered for properties sold at over HKD 100 million (excluding land auctions), down 51% from the 363 transactions recorded in 2012. The office sector attracted the greatest amount of investment capital, with total consideration accounting for about 41% of the whole market, followed by retail (22%), residential (20%) and industrial (17%).

Capital values in the commercial property markets continued to trend higher in 2013 despite the shrinking transaction volumes. Investment activity was largely driven by end-user demand and focused mainly on noncore areas. In the office sector, new developments launched in non-traditional business districts such as Global Trade Square in Wong Chuk Hang, Billion Plaza II in Cheung Sha Wan and YHC Tower in Kowloon Bay drew considerable interest from both investors and end users. A number of Chinese firms and international insurance firms were also attracted by the long-term investment opportunities in secondary submarkets. A similar trend of decentralisation was found in the retail sector, which saw investors quickly shifting their focus to secondary streets in prime locations and retail premises in decentralised locations such as Tsuen Wan, Tuen Mun and Shatin.

“Looking into 2014, investment demand is expected to remain sluggish, and market sentiment will likely deteriorate further, considering the restrictive measures that are currently in place and looming interest rate hike,” Tsang commented. “However, capital values of commercial properties are projected to remain largely stable after reaching record-high levels, and an increasing number of non-core assets will be favoured by investors who seek to cash in on gains. Against this backdrop, we expect capital values of Grade A offices and high-street shops to stay broadly unchanged, while values of warehouses will grow by up to 5% in 2014. With no signs of the restrictive measures being lifted anytime soon, we expect capital values of luxury and mass residential properties to decline by around 10–15% in 2014."