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News Release


JLL: Falling land prices adds further pressure on housing market

Mainland developers start to cool on government land sales

​Hong Kong, 7 July 2016 - Hong Kong's residential land prices in select districts have fallen by as much as 20% over the past 12 months, according to JLL's Mid-year Land and Property Review 2016 published today. With mainland developers starting to cool on government land sales in the second quarter, land prices are expected to fall further in the second half and add yet more pressure on the housing market.

Highlights of the report:

  • Land prices in select districts have dropped by as much as 20% over the past 12 months.
  • Capital values of mass residential properties forecasted to drop 10-15% this year, luxury residential will fare slightly better, down 5-10%.
  • Recovery of the Central office market spurs a new round of tenant decentralisation, further changing the landscape of the Hong Kong office market.
  • To help stimulate sales, more retailers open crossover concept stores, while shopping centre landlords add more pop-up stores and F&B offerings.
  • Rental growth for warehouse properties is expected to turn negative in the second half.
  • European sources of funds may find Asia-Pacific more appealing as a safe haven investment alternative.

    Retail Market

    Hong Kong tourist arrivals contracted 8.4% y-o-y in the first five months of the year, compared with growth of 3.9% y-o-y recorded in the corresponding period in 2015. Arrivals from mainland China continue to fall, down 11.8% y-o-y. But the year-to-date tourism market saw positive growth from markets such as Thailand, Singapore, Japan and the UK.

    Hong Kong's total retail sales declined 10.8% y-o-y in the first five months of 2016, against average annual growth of 9.1% over the last 10 years. The fall in retail sales was led by the ongoing plunge in jewellery and watch sales and the consumer shift away from luxury goods and towards mass market goods. Adding to this has been a strengthening Hong Kong Dollar, which has made other global shopping destinations more enticing for mainland tourists.

    The yearlong slump in retail sales continued to have a negative effect on the property market where rents of high street shops fell 8.1% in the first half after falling 22.6% last year. Luxury retailers remained the hardest hit with several seeking to consolidate stores. Supported by the sustained preference of retailers to open stores in prime shopping centres, rents of prime shopping centres stayed firm in the first half.

    Terence Chan, Head of Retail at JLL, said: "Mid-range and lifestyle retailers along with F&B operators are now the primary drivers of demand as luxury brands and watch & jewellery retailers further retreated from the market. To help stimulate sales, more retailers are exploring opportunities to open crossover concept stores to raise brand profile while developers are adding more pop-up stores and increasing the share of F&B tenants to draw shoppers. Despite vacancy in prime shopping centres remaining tight, some centres are starting to feel vacancy pressure as retailers consolidate stores. This is likely to lead to some prime shopping centres trimming rents in the second half, dragging overall rents lower for the full year. For high street shops, we forecast rents to fall 10-15% in 2016." 

Office Market

Limited availability and rising rents in Central along with completion of new high quality supply in non-core area markets has renewed tenant interest in decentralisation and is changing the landscape of the Hong Kong office market. This combination of push and pull factors has led to a couple of international law firms relocating their offices from Central to Hong Kong East, marking the first time this has occurred in the local market, and a foreign bank's lease of several floors at New World Development's upcoming Hong Kong K11 Office project in Tsimshatsui, for relocation and consolidation, in the first half.

The FIREBS (Finance, Insurance, Real Estate and Business Services) sector remained as the key driver of leasing demand in office market, accounting for 48% of all new lettings, by floor space. Within the sector, banking and finance accounted for 48% of new lettings while insurers and co-working space operators accounted for 36%.

In Central, leasing activity continued to be underpinned by expansions and new set-up requirements from PRC firms, especially those engaged in the securities trading and asset management. Demand from PRC firms represented 37% of all new leases in the first half.

In the first half, the gross leasing volume (GLV), which captures actual contracts signed in the market, for the overall market has increased by 27% from 1.9 million sq ft in the second half of 2015 to 2.4 million sq. In contrast, between GLV and net absorption, which amounted to just 220,000 sq ft in the first half, reflects the high level of leasing negotiations being carried out on office space which has yet to be made available on the market.

With the vacancy rate remaining at below 3% across most major office submarkets, with the exception of Kowloon East, tenant options remained limited. The higher vacancy rate in Kowloon East, which increased to a two-year quarterly high of 7.3% at the end of the half, was largely attributed to two sizable lease expiries and the completion of new supply. On Hong Kong Island, availability remained tight with vacancy largely concentrated in non-core business districts including Wong Chuk Hang on the south side of the island. The vacancy rate in Central stood at just 1.4%.

Supported by limited availability, office rents in all major office markets with the exception of Kowloon East grew further in the first half. Rents in Central grew 4.8% to HKD107.4 per sq ft and to their highest level since the Global Financial Crisis. Benefiting from PRC demand, rents in Central's Grade A1 office buildings increased 7.2%.

Alex Barnes, Head of Hong Kong Markets at JLL, said: "Leasing demand is likely to moderate in the second half owing to the more modest growth forecasted for the local economy. Tight vacancy, due to a lack of new supply, also hinders the ability for larger tenants to move around the market. The completion of new high quality supply in non-core locations including non-traditional office markets such as Wong Chuk Hang will provide tenants with cost saving opportunities. For Central, PRC firms will remain as the key source of demand and rental growth,"

"We expect Grade A office rents in Central to grow in the range of 5-10% this year. Overall, rents are expected to grow by 0-5% though rental markets in Kowloon including Tsimshatsui and Kowloon East are likely to retreat slightly for year."

Land and Residential Market

Constrained by a weakening economy and uncertainties around the market outlook, local developers adopted increasingly conservative bidding strategies in government land sales. Mainland China developers were particularly active early in the year as they pressed on with their globalisation plans; acquiring three of the first eight residential sites sold via public tender. The dim outlook held by developers was reflected in the land sales results, with five of the winning bids coming in at below the lower end of market expectations. Based on our analysis of government land sales results, residential land prices in select districts have fallen by as much as 20% over the past 12 months. With interest from mainland developers also starting to cool in the second quarter, this trend is likely to continue over the short-term.

Home sales reached their lowest levels on record in the first quarter before recovering slightly in the second quarter. Still, average monthly sales volumes in the first half fell 38.3% y-o-y to 3,320, compared with the monthly average of 5,377 recorded in the corresponding period in 2015. Home sales from January to March were lower than the previous market lows posted during SARS outbreak when monthly transactions fell to as low as 4,130 in May, 2003.

In the primary market, an increasing number of developers are now extending financing plans to prospective buyers to help boost flagging sales as an alternative to cutting asking prices or offering further discounts. Still, this has remained largely restricted to developers with better financial standing and stronger balance sheets who have an edge over smaller sized developers in providing such aggressive financing schemes. Market response to these schemes, however, has been mixed. 

In the secondary market, capital values of mass residential properties trended down 6.4% in the first half as volatility in the local stock market and the prospect of further interest rate hikes led to more homeowners willingly lowering prices. Still, the main challenge for home seekers remains the stringent Loan-to-Value measures which act as a barrier to entry, especially in the secondary market where buyers are unable to benefit from financing options and rebates. Capital values of luxury residential properties, which had been faring better, are now also starting to soften, down by 1.9% in the first half.

One segment of the market which continues to buck the trend is the ultra-luxury property market where buying interest remains largely intact through the first half. A total of 55 properties priced over HKD 100 million were sold, which was 15% less than over the corresponding period a year earlier but the average transaction value increased by 8% to HKD 304 million; reflecting the willingness of buyers to pay a premium to secure properties that rarely come to market.

In the residential leasing market, economic uncertainties and less optimistic hiring intentions continued to affect leasing demand for luxury residential properties. With more tenants downgrading to units commanding smaller lump sums, rentals remained under pressure.

Joseph Tsang, Managing Director and Head of Capital Markets at JLL, said: "The government's spicy measures have and will continue to restrict upgrading activities in the market. With more than 35,000 units looking to be launched onto the market over the next 12 months, developers will have to continue to use aggressive sales tactics to draw buyers. Housing prices in districts such as Yuen Long and Tsuen Wan, which have the greatest number of new launches in the coming 12 months, are likely to be under the most pressure. Coupled with the uncertainties in the interest rate outlook and flagging results in the government's land sales market, home prices are expected to remain under pressure. Hence, despite the recent signs of stabilisation, we maintain our view that capital value of mass residential will drop 10-15% this year, while luxury residential will decline 5-10%."

"The residential leasing market will turn increasingly tenant-favourable against a surge in rental supply and creeping vacancy at the top-end of the market. The leasing environment will continue to face challenges against dim hiring intentions and a gloomy economic outlook. As a result, we expect rents will drop 5-10% this year."

Industrial Market

The ongoing slowdown of the mainland Chinese economy continued to weigh on trading volumes through the first half with total exports declining by 4.5% y-o-y through the first five months. Airfreight cargo handled during the period declined 2% y-o-y while container throughput was down 6.6% y-o-y. It is still too early to assess the full impact of BREXIT on the trading sector given that it will take time for all the consequences to be reflected in the trade data. Still, given that the UK accounted for less than 2% of Hong Kong's total merchandise exports in 2015, any impacts will likely be minimal.

Leasing demand for industrial properties, in general, softened amid weakening economic conditions. Retailers were among the most active in warehouse leasing market through the first half, accounting for about 47% of new lettings, by floor area, which was a significant increase from the 7% share recorded in the first half of 2015. Reflecting the weakness in the external trading environment, third-party logistics operators (3PLs), accounted for just 4% of all new lettings.

The vacancy rate for the overall warehouse market increased from 1.7% at the end of 2015 to 2.9% at the end of the first half. The rise in vacancy was primarily as a result of the completion of new supply—Mapletree Logistics Hub Tsing Yi—completed in the first quarter. In the rest of the market, most warehouses continued to enjoy relatively high occupancy despite the weak performance of key demand drivers.

The tight vacancy environment continued to provide support to rents. Warehouse and flatted factory rents rose moderately though weakening demand and the build-up of shadow space saw the growth in warehouse rents moderate over the first half, from 0.7% in the first quarter to 0.1% in the second quarter.

Ricky Lau, Head of Industrial at JLL, said: "Hong Kong's external trading sector is expected to continue to face headwinds in 2016 on the back of an appreciating Hong Kong Dollar and the ongoing slowdown of both the global and mainland Chinese economy. Rental growth for warehouse properties is expected to turn negative in the second half as vacancy builds amid a weak growth environment. Ramp-access warehouses, which typically command the highest rents in the market, will face the greatest pressure as tenant affordability deteriorates. Lift access warehouses and those in decentralized locations will likely fare better. We expect warehouse rents to reverse the gains posted in the first half of the year and end the year lower, down 0-5%."

Investment Market

Global capital flows has become the market focus after BREXIT. Europe has been the most popular regions, globally, for real estate investors over the past two-years with inter-regional flows into Europe amounting to USD 163 billion; more than the US (USD 140 billion) and Asia-Pacific (USD 34 billion). A similar trend exists for Asia-Pacific investors, who have over the past two-years invested more USD 29 billion into European real estate.

Going forward, given the slide in the Euro and sterling against most major currencies, European sources of funds may find Asia-Pacific more appealing as a safe haven investment alternative given political and economic uncertainties within the UK and European Union. However, whether this capital will find a home in Hong Kong remains to be seen given that property prices are at record highs and yields at record lows. Moreover, with the US Federal Reserve now less likely to raise the interest rates further this year, it will be hard to envision pricing in Hong Kong's property markets deteriorating significantly.

Investment volumes across all commercial asset classes amounted to HKD 31.3 billion in the first half of 2016, 7.9% more than the HKD 29 billion recorded over the same period a year ago. In office sector, PRC corporates remained active in acquiring en-bloc office buildings and contributed to the volume of office transactions worth over HKD100 million surging 133% y-o-y in the first half despite the number of transactions dropping 54% y-o-y. Supported by record setting transactions, capital value of Grade A offices grew by 1.3% in the first half.

The market for retail properties continued to be limited by the expectation gap between buyers and sellers. Those active in the market were largely investors focused on large-scale assets with upgrading potential. Only 16 retail assets worth over HKD100 million were sold in the first half, compared with 37 transactions recorded in the same period a year earlier. With fewer properties being sold and capital values of street shops falling 8.7%, investment volume for retail properties plunged 59% y-o-y in the first half to HKD 5.8 billion.

In the industrial market, most investors have adopted a wait-and-see approach after the government's revitalisation policies expired in April. Still, given the growing interest in the city's warehouse market, especially for high-specification warehouses, capital values of warehouse grew 5.4% through the first half of the year. In contrast, capital values of industrial/office assets, which generally reflect office demand rather than industrial demand, grew by a much more moderate 0.5%.

Tsang said: "Looking ahead, given where prices and yields currently stand, larger transactions will be dominated by end-users purchasing for long-term investment. The full impact of BREXIT on capital markets remains to be seen. Whilst the renewed outlook on interest rates should lend support to capital values, economic uncertainties could still dampen sentiment. We expect the capital value of Grade A office to grow by 0-5% this year, while those of warehouses are forecasted to grow by 5-10%. But the capital value of high street shops will likely drop 15-20%."


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