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News Release


JLL: Shenzhen-HK Stock Connect to boost office demand in Central further in 2017

Investment demand for commercial properties at the crossroads

​​​​Hong Kong, 6 December 2016 – The launch of Shenzhen-Hong Kong Stock Connect is expected to further support demand from PRC financial services firms in Central. Along with a tight vacancy environment, this will help Central buck the trend to be the only office submarket to record rental growth in 2017, according to JLL in its Year-end Property Re​view 2016 published today.

Highlights of the report:

  • Central's Grade A office rents will rise 0-5% in 2017, after growing 9.2% through the first 11-months of 2016.
  • Tenant decentralisation gathering pace as rental gap between core and non-core business areas widens.
  • Rents in prime shopping centres are expected to continue to soften in 2017 after they started to fall in the second half of 2016.
  • High street shop rents to bottom-out in the second half of 2017 after dropping 37% over the past two years.
  • Increasing supply side pressure to lower rents of warehouses by 0-5% in 2017.
  • Over a quarter of total investment volumes in 2016 were contributed by PRC investors.
  • Outlook for the investment market clouded by Mainland government's recent measures to increase scrutiny on outbound real estate transactions.

    Office Market

    Tenant decentralisation gathered pace in 2016 as the rental gap between core and non-core office areas widened to their largest levels in five years. Grade A office rents in Central are now, on average, up to 3.3 times higher than those in non-core areas. The move out of Central was highlighted by a couple of UK law firms relocating to Hong Kong East, a trend that had previously not been seen in the market. The market also saw several foreign banks downsize their footprints in Central. Outside of Central, insurers were among the most active taking on expansion as insurance premiums surged on the back of increasing demand from Mainland Chinese policyholders. In Central, requirements from PRC financial services firms remained as the major driver of demand, accounting for about 44% of all new lettings (by floor area), up from 35% in 2015.  

    Beyond the all-important banking and finance sector, the leasing market also benefitted from the expansion of co-working space operators. US operator, WeWork, was the most notable new market entrant, leasing 105,400 sq ft across two locations in Wanchai/Causeway Bay. The appeal of co-working platforms led to a number of landlords reserving floors with an eye to accommodate operator requirements.

    A steady pipeline of new construction has seen Kowloon East overtake Wanchai/Causeway By as the second largest Grade A office submarket in the city, in terms of stock. It also now has the highest vacancy rate (10.7%) among all key Grade A office submarkets. Though still at relatively low levels on Hong Kong Island, vacancy rates started to trend higher towards the latter part of the year as demand, in general, remained weak.

    Sustained PRC demand in Central helped push rents up by 9.2% to HKD111.9 per sq ft through the first 11-months of 2016. Rents are now about 4% shy of the all-time highs set in 2008 just prior to the Global Financial Crisis. In contrast, increasing supply side pressure contributed to rents in Tsimshatsui and Kowloon East to retreat by 0.5% and 1.5%, respectively, through the first 11-months of the year.

    Ben Dickinson, Head of Agency Leasing at JLL, said: "The launch of Shenzhen-Hong Kong Stock Connect should further support demand from PRC financial services firms in Central. But we expect leasing demand will moderate in 2017 owing to the modest growth forecasted for the local economy. Net take-up is expected to amount to about 690,200 sq ft, compared with a net withdrawal in 2016. We expect Central to be the only submarket to record rental growth next year, in the range of 0-5%, on the back of a tight vacancy environment. All other office submarkets are expected to post declines with rents in Kowloon East, where vacancy is concentrated, under the greatest pressure."  
  • ​Hong Kong Prime Office Indicator – % Change



2017 Rental Forecast
Wanchai/Causeway Bay+3.7%-0-5%
Hong Kong East+1.6%-0-5%
Kowloon East-1.5%-10-15%


Retail Market

Arrivals from mainland China are on track to drop for the second consecutive year after decreasing by 8.2% y-o-y in the first ten months of 2016 and 3.0% in 2015. Mainland visitors utilising the Individual Visit Scheme (IVS) was down 15.6% y-o-y over the same period.   

Total retail sales declined 8.9% y-o-y in the first 10 months of the year, against an average growth rate of 9.1% per year over the last 10 years. Aside from a drop in Mainland visitor arrivals, the changing shopping pattern of Mainland consumers as well as the depreciation of RMB and on-going anti-corruption drive in China also continued to weigh on sales. The luxury sector continued to feel the full brunt of the slowdown with sales of luxury goods such as jewellery and watches plunging by 19.7% y-o-y through the first 10 months of the year. Still, there were some bright spots in the market. The F&B sector, which relies heavily on the domestic market, grew 2.5% y-o-y in the first three quarters of the year, the highest among all retailing groups. The contraction in retail sales was reflected in the Hong Kong property valuation​ market where average monthly rental of High Street Shops plunged 18.4% to HKD 462 per sq ft in 2016 while rents in Prime Shopping Centres started to soften in the second half of the year to end the year down 1.0%.

In the leasing market, mid-range and lifestyle retailers along with F&B operators remained as the main source of demand. New-to-market brands and gastronomic groups also continued to show keen interest on opening their first stores in Hong Kong. Looking ahead, demand is likely to remain dominated by these players. Vacancy in Prime Shopping Centres is set to rise with the completion of the New World Centre redevelopment project in Tsimshatsui in the first half of 2017.  

Terence Chan, Head of Retail at JLL Hong Kong, said: "High Street Shop rents are expected to bottom-out in the second half of 2017 after having dropped 37% over the past two years. Still, with concentration of demand coming from mid-range retailers and F&B operators, we expect rents of High Street Shops and Prime Shopping Centres to retreat a further 0-5% in 2017."

Hong Kong Prime Retail Indicator - % Change




2017 Rental Forecast
High Street Shops▼18.4%▼0-5%
Prime Shopping Centres▼1.0%▼0-5%


Industrial Market

A slowing Mainland economy and weak global trade markets continued to set a challenging backdrop for Hong Kong's external trading sector with the total value of imports and exports declining by 2.9% y-o-y and 2.5% y-o-y, respectively, through the first 10 months of 2016.

Tempering demand from 3PLs in the warehouse leasing market was partially offset by an uptick in requirements from retailers and other end-users with the share of new lettings from this cohort increasing to 32% in 2016 compared to just 7% in 2015. Despite tightening in the second half, the overall vacancy rate for warehouses ended the year higher at 2.6% compared to 1.7% at the end of 2015.

Warehouse rents climbed 3.5% in 2016, driven by growth in the lower end of the market as tenants sought more cost-effective space. Average rent of warehouses now stands at HKD 13.2 per sq ft. In the broader industrial market, flatted factories rents rose 2.7% to HKD 12.3 sq ft, supported by demand from warehouse users looking for storage options against a limited supply of cargo lift access warehouses. Meanwhile, competition from revitalised/refurbished industrial buildings and new Grade A office supply put pressure on I/O rents, which dropped 1.7% to HKD17.4 per sq ft per month. Although the government's 'nil waiver' policy to promote the revitalisation of older industrial buildings ended in March, approved projects are still valid until March 2019. Moreover, the 'nil waiver' policy for data centre conversions remains in place. As a result, we expect this policy to continue to have an impact on the market over the near-term.

The outlook for the trading sector remains mixed though most economists agree that 2017 will improve from 2016 levels. Still, the lagged effects of the weak external trading environment and rising vacancy will continue to weigh on warehouse rents.

Ricky Lau, Head of Industrial at JLL, said: "With the completion of new supply and the build-up of marketable space, vacancy pressure in the warehouse market will steadily increase over the next 12-months. This will gradually exert more pressure on landlords to lower rents. As such, we expect warehouse rents to retreat 0-5% in 2017."       

Hong Kong Warehouse Indicator -- % Change




2017 Rental Forecast
Flatted Factories▲2.7%N/A


Investment Market

The total investment volume of commercial and industrial properties over HKD 100 million dropped by 11% to HKD 63 billion in 2016. Larger transactions continued to be underpinned by PRC investors which accounted for at least a quarter of total volumes, on par with 2015 levels.

The office sector was the most traded asset class with investment more than doubling to HKD 46.5 billion and accounting for 74% of total investment volume, compared to only 36% in 2015. The uptick in volumes was led by acquisitions made by PRC investors, which accounted for 30% of investment volume in the sector, tight vacancy environments in the city's core business areas and the availability of prime Grade A office assets on the market. The on-going slump in the city's retail sector kept investors at bay even though it was the only sector where capital values were in decline while investors adopted a wait-and-see attitude on industrial properties following the lapse of the government's industrial building revitalisation policies.

In 2016, capital values of Grade A offices grew by 4.2%, driven by record breaking en-bloc sales transactions and a strong land sales market. Capital values of warehouses also surged 11.5%. In contrast, capital values of High Street Shops slumped 18.3%.

Denis Ma, Head of Research at JLL, said: "The investment market for commercial and industrial properties is now at a crossroads. Although the markets ended the year higher, they face increasing pressure from weakening rental markets and rising interest rates. Importantly, the liquidity provided by PRC investors is expected to fall significantly after the Mainland government imposed capital controls on overseas real estate investments. Without PRC investors, the scope for capital values to continue to push higher will be severely restricted. Still, we expect capital values of office and warehouse assets to grow 0-5% next year given that most vendors remain lukewarm towards disposing of assets cheaply. With the headline indicators for the retail sector showing signs of stabilising, the decline in High Street Shops will moderate to 5-10% only." ​

Hong Kong Investment Indicator – % Change

Submarket / Sector

Capital Values*


2017 Capital Values Forecast
Prime Office
Wanchai/Causeway Bay+5.1%+0-5%
Hong Kong East+3.5%+0-5%
Kowloon East+0.3%+0-5%
Prime Retail
High Street Shops▼18.3%▼5-10%
Prime Shopping Centres▼1%N/A
Flatted Factories▲0.6%N/A



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