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News Release

Hong Kong and Macau

Luxury Residential Capital Values Back to Pre-crisis Levels

According to Jones Lang LaSalle’s Asia Pacific Property Digest for the third quarter


With the growing interest from Mainland Chinese in buying luxury residential properties, coupled with improvements in leasing demand, capital values across most of the property sectors continued to rise in 3Q09. The warehouse market was the only sector that did not register capital value growth due mainly to the subdued external trading sector, reports Jones Lang LaSalle’s Asia Pacific Property Digest for 3Q09.
 
Residential Market
The residential sales market remained energetic in 3Q09 and capital values are now back to their pre-crisis peak levels. The primary sales market was particularly active, with local and Mainland Chinese high net worth individuals snapping up properties and pushing capital values high.
 
The buoyant sales market has led to reducing leasing stock as individual landlords hold back their units for vacant procession sale. However, supply in the top-end market remained ample as tenants were downgrading to reflect their lower housing budgets.
 
The first three quarters saw luxury residential capital values growing by 26%, after rising a further 8.8% q-o-q in 3Q09. Rents were up 1.1% q-o-q in 3Q09, bringing the year-to-date decline to 8.6%.
 
‘Rents are expected to rise mildly in the next three to six months, but a more significant pick-up in leasing demand and rental growth will have to follow a more sustainable expansion in the corporate sector’, said Marcos Chan, Head of Research, Greater Pearl River Delta at Jones Lang LaSalle.
 
Market
The third quarter continued to see larger occupiers decentralising into the non-core markets of Kowloon, for the better building specifications and lower rentals available in places like Kwun Tong and Kowloon East. However, the core markets were able to register some notable transactions, most of which were for satisfying tenants’ relocation requirements.
 
The investment sales market was active in 3Q09, highlighted by MGPA’s stratification of the Grand Millennium Plaza Lower Block in Sheung Wan. About 70% of the stratified floors in the building was sold as of end-September. Nexxus Building was reportedly sold for HKD 3.6 billion in Central.
 
The quarter saw the completion of Billion Centre and Crocodile Centre in Kowloon East, adding a total of 558,750 sq ft (net) of space to Hong Kong’s Grade A office stock. As of end-3Q09, overall Grade A office vacancy rate stood at 7.7%.
 
Rental decline slowed to 2.7% q-o-q in 3Q09, bringing the average net effective rentals to HKD 40.1 per sq ft per month. Investment yields continued to compress as capital values grew a further 9.1% q-o-q during 3Q09.
 
‘ We expect Grade A office rentals to remain overall stable in 4Q09, but buildings with higher vacancy pressure may see a little further downside,” commented Chan.
 
Retail Market
The retail market was emitting encouraging signs as local consumer confidence improves and inbound tourism picks up. Hong Kong’s retail sales fell by 3.3% y-o-y after falling by 5.1% y-o-y last quarter.
 
Watch and jewellery retailers remained as the most active group in the leasing market looking for spaces in the core shopping districts, while retailers from other trades were still cautiously optimistic.
 
Prime street shop rents edged up, on average, by 0.5% q-o-q, while prime shopping centres rents declined on average by 0.5% q-o-q. The increasing demand for investment properties helped lift capital values for prime street shops by 5.9% q-o-q in 3Q09. ‘We expect retail rentals will remain largely stable in 4Q09 and provide support to capital values in the next few months,’ remarks Chan.
 
Warehouse Market
Leasing demand for warehouse properties remained generally slow in 3Q09 as there were no signs of solid improvement in the external trade sector. Although the quarter saw landlords facing reduced pressure from subletting spaces, downsizing remained a common practice amongst tenants upon lease expiry.
 
On the investment side, local investors became more active in the sales market in 3Q09, with a number of warehouse and industrial buildings being sold en bloc.
 
Capital values of warehouses remained stable during 3Q09. Rental decline for the quarter narrowed to 1.2% q-o-q as compared to the 2.8% fall in 2Q09. ‘Investment demand should remain strong, considering that prices of industrial properties are still at relatively low levels with attractive yields as compared to the other property sectors,’ Chan concluded.