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News Release

Hong Kong

JLL: Residential Market still Clouded with Concerns over Restrictive measures

Capital values of commercial properties expected to remain largely stable for the rest of 2014

​​​​​Hong K​ong, 8 July 2014 – Despite the positive response to new primary launches, the residential market is still clouded with concerns over the government's restrictive measures.  The Central office market continued to show signs of pick-up led by leasing demand from Chinese corporates, while sentiment in the retail market has been affected by slowing retail sales, a potential quota on the Individual Visit Scheme (IVS) and changing consumption pattern of Chinese tourists, according to JLL Hong Kong in its Mid-year Property Review 2014 published today.

Office Market

Leasing demand in the Grade A office market remained moderate in the first half of 2014, with overall net take-up amounting to only about 318,700 sq ft. However, it was an improvement from a negative net take-up of 269,000 sq ft in the whole year of 2013. Leasing activity was underpinned by renewals with few tenants willing to spend upfront on relocation costs.

Central continued to see signs of a pick-up with net take-up amounting to about 133,000 sq ft, largely supported by expansion and consolidation requirements from the banking and finance sector. Demand in the top-end of the market was surprisingly strong. With Grade A1 office rentals having fallen by around 20% from their 2011 peaks, tenants were able to renew leases below their existing rental levels. Chinese companies actively expanding and upgrading their office requirements to meet their business expansion in Hong Kong contributed to a significant part of the growth in this part of the market. However, new lettings in Central were still dominated by smaller requirements (i.e. less than 10,000 sq ft).

The finance, insurance, real estate and business services (FIREBS) sector remained the most active driver of leasing demand. Merchandisers and sourcing companies also played a key role in driving leasing activities in the Kowloon market, while the Information Technology and Telecommunications sector in Hong Kong East and Cyberport was mainly led by requirements from leading technology firms including Facebook, AT&T and Computer & Technology.

The overall vacancy rate stayed flat (4.4%) in 1H14, with vacancy largely concentrating in several mid-tier and lower-end buildings. In Central, the vacancy rate continued to improve, edging down from 4.6% at end of December 2013 to 4.0% by end of June; benefitting from robust leasing demand in the top-end of the market which saw vacancy in the Grade A1 segment tightening to three year lows.

In Kowloon East, the vacancy rate declined from 7.8% in 2013 to 6.7% by end of June with purchases by owner-occupiers in newly completed Grade A offices contributing to expansion of the occupier market. Over 40% of the vacant space in the submarket, however, was concentrated in buildings built for the sales market.

Rentals grew by 1.3% in 1H14, gathering momentum across all submarkets except in Kowloon East where increased competition from refurbished industrial buildings (utilising the government's revitalisation policies) led to a marginal rental decline in 1H14. In contrast, rentals in Central returned to growth, edging up by 1.9% in 1H14 on the back of tightening vacancy at the top end of the market. Nevertheless, with the mid-range of the market remaining under vacancy pressure, the ability for landlords to aggressively push rentals was limited.

Ben Dickinson, Head of Markets at JLL Hong Kong, remarked, "We expect leasing demand for the whole office market to remain stable given the moderate economic growth forecast ahead. Low vacancy rates and the lack of new supply being completed in the city's traditional core-area markets will also lend support to the leasing market. Against this backdrop, we believe rentals in all submarkets except Kowloon East will continue to trend higher, in the range of 0-5% for 2014 as a whole."

Hong Kong Prime Office Indicator – % Change


Capital Values




2014 Rental Forecast
Wanchai/Causeway Bayp0.1%p0.6%p0–5%
Hong Kong Eastp0.4%p1.3%p0–5%
Kowloon Eastp1.2%q0.1%q0–5%

Retail Market

The growth in mainland Chinese tourist arrivals, albeit at a slowing rate, continued to provide support to Hong Kong's retail property sector. Through the first five months of 2014, the total number of mainland Chinese visitor arrivals into Hong Kong increased by 17.6% y-o-y, contributing to about 77% of all visitor arrivals (24 million). By comparison, the total number of visitor arrivals grew by just 13.6% y-o-y over the same period. Among mainland Chinese visitors, around 67% travelled under the IVS, and an increasing number were inclined to take day trips, resulting in 18.9% y-o-y growth in same-day visitors from China from January to May this year.

In addition to the slowing rate of growth towards the end of 1H14, the lower spending and changing shopping patterns of Chinese tourists, who increasingly prefer spending more on affordable luxury and mid-priced products instead of expensive goods, also started to weigh on the market. Retail sales retreated by 0.2% y-o-y from January to May, with April sales plunging 9.9% y-o-y; the most in a month since February 2009. The slowdown was mainly led by a decline in the sales of jewellery and watches, which dropped 20.6% y-o-y during the first five months, although it was partly attributable to a high comparison base due to the gold sales spree last year.

Vacancy in prime shopping locations remained extremely low. However, slowing retail sales raised market concerns over rental growth prospects and as a result, retailers were increasingly hesitant on bidding up rentals bringing about greater vacancy and rental pressure for shops off the High Streets..

Despite headwinds in the inbound tourism sector, the sustained local consumer market that is underpinned by extremely low unemployment rates, should help drive retail sales higher in 2H14. In addition, according to JLL's latest retail research report, international brands still view Hong Kong as the most favourable destination to open their flagship stores in the Asia Pacific region, while mid-tier brands are projected to outpace luxury labels in expanding their footprint in the city's retail scene for the near future.

Tom Gaffney, Head of Retail at JLL Hong Kong, said, "The government's 'proposed' plan to impose a quota on the IVS, coupled with the changing consumption pattern of Chinese tourists, will inevitably raise concerns in the market. Against this backdrop, we have seen retailers starting to adopt a more measured approach towards opening stores and negotiating on rentals. Looking ahead, we believe the retail market will be driven increasingly by sales of mass market and affordable luxury goods. Meanwhile, retail rentals will likely grow in the modest range of 0-5%, although rents in some High Street shops may experience a slight contraction." 

Hong Kong Prime Retail Indicator – % Change


Capital Values



(Jan–May 2013)

2014 Rental Forecast
High Street Shopsp0.8%p0.8%p0-5%
Prime Shopping CentresN/Ap0.9%p0-5%

Residential Market

The government's restrictive measures continued to weigh on the city's residential sector, with average monthly home sales standing at 4,500 transactions from January to May, a volume just 6% above the 2013 level (4,200 transactions). A small pick-up in sales activity was recorded in April and May after the government relaxed conditions associated with the Double Stamp Duty (DSD).

With the government's cooling measures still in place, existing home owners continued to adopt a wait-and-see attitude with little pressure to sell amid the still low holding cost environment. Sales volumes in 1H14 declined in most segments compared to last year except for properties selling in the HKD 30-50 million range, which saw relatively more primary transactions on the back of more new launches. The positive response to these new launches were due  to a combination of developers setting prices largely on a par with secondary home prices nearby and by offering an array of discounts and incentives. For some projects, over 90% of the units had been sold by end June.

 However, discounting in the primary market had limited impact on secondary market prices. In fact, despite prices in primary market coming down to those in the secondary market, home prices in the secondary market recorded only very marginal declines. Both mass and luxury residential capital values retreated marginally by about 1% in 1H14. In the leasing market, soft demand in the top-end of the market contributed to an almost 5% decline in luxury rentals in 1H14.

 Supply in the residential sector is expected to increase in the upcoming few years. An estimated 17,900 units are slated for completion by 2014, higher than the ten-year average (from 2003-2013) of 12,800 units per year, but still far way below the long-term average of 27,000 per year from 1990 to 2003. Looking ahead, the supply pipeline will increase further in 2016 and 2017 once the residential units from the government's recent land sales are realized.

Joseph Tsang, Managing Director of JLL Hong Kong, commented, "Activity will be focused on the primary sales market for the rest of 2014, as developers continue with their competitive pricing strategies to drive up sales. Affected by downside risks including the looming interest rate hike and policy measures that are still largely in place, capital values in both luxury and mass sector will likely continue to experience mild corrections, although home prices may be more resilient than previously forecast."

 Hong Kong Prime Residential Indicator – % Change


Capital Values




2014 Rental Forecast


Industrial Market

The external trading sector has been on a steady track of improvement, with growth of freight volumes reaching three-year record highs in 2Q14. Air-freight volumes at Hong Kong International Airport increased by 6.2% y-o-y through January to May, while container throughput at the city's port grew 3.5% y-o-y over the same period.

 The pick-up in external trade and outsourcing requirements saw logistics and Third-party logistics (3PL) return to the warehouse leasing market with vigour. Demand for warehouses with large floor plates (over 40,000 sq ft) close to the city's container port and at monthly rentals less than HKD 10 per sq ft attracted the strongest interest, keeping vacancy in the sector at very low levels.

 Industrial property rents across all asset classes have reached new record highs in a low vacancy environment with limited new supply. In particular, warehouse rents have steadily accelerated, which was attributable to demand growth in properties in non-core locations. Meanwhile, rents of I/O properties and Flattered Factories continued to trend higher in spite of increased supply from newly redeveloped/refurbished properties.

Ricky Lau, National Director and Head of Industrial at JLL Hong Kong, commented, "We expect improvements in the external trading environment and a steady flow of outsourcing requirements to continue to support demand for warehousing space. In addition, the proposed changes to the transfer of sub-lease interests in industrial estates may lower land supply for specialised factories moving forward. With no immediate new supply until 2015 and still tight vacancy rates, warehouse rentals are projected to grow in the range of 5-10% for the whole year of 2014."

Hong Kong Warehouse Indicator – % Change


Capital Values




2014 Rental Forecast
Flatted Factoriesp5.0%p7.9%p5-10%


Investment Market

The investment market remained largely subdued in1H14, with activity mostly driven by end-user demand and focused mainly on emerging areas. Higher stamp duties imposed by the Government continued to weigh on the market, but it was worth noting that investors looking for long-term investments were coming back to the market despite the higher transaction costs.

 The total value of investment across the four key property sectors amounted to HKD26.5 billion in 1H14, representing a 23% growth compared to 2H13. Capital values held relatively firm on the back of the positive response to commercial land sales, with the strongest growth recorded in industrial markets bolstered by investor interest in the refurbishment and redevelopment of older industrial properties.

 From January to May, a total of 97 properties priced over HKD 100 million (excluding land auctions) were sold, up 24.4% from 78 transactions recorded in 2H13. The retail sector attracted the greatest amount of investment capital, with total consideration accounting for about 37% of the whole market, followed by office (27%), residential (26%) and industrial (10%).

 Capital values in the commercial property markets continued to trend higher in 1H14 despite the shrinking transaction volumes. In the office sector, investment volumes reached HKD 7.3 billion, underpinned by end-user purchases, including Citi's acquisition of the East Tower of One Bay East office development in Kwun Tong for HKD 5.4 billion. In the retail sector, improving local consumption and sustained growth in Mainland Chinese visitor arrivals continued to fuel the interest of long-term investors while large-sized premises in non-core locations with value-add potential also received strong interest.

 "An increasing number of non-core assets will likely come onto the market as investors seek to cash in on record high prices. Larger transactions will be dominated by end-users or long-term investors. Capital values of commercial properties are likely to remain largely stable though some street shops facing rental adjustments may come under increasing pressure, while residential market will continue to be affected by the government's restrictive measures. Against this backdrop, we expect capital values of Grade A offices and High-Street shops to stay flat, while values of warehouses will grow by up to 5-10% 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 5-10% and 0-5%, respectively, for the whole year of 2014." added Tsang.

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