[CBRE HK Q319 MarketView] Review and Commentaries for Office, Retail, Industrial and Investment Sectors

Retail rents endure biggest fall in 21 years; office rents and investment volume also decline

CBRE Q3 2019 Highlights

Grade A Office
- The ongoing U.S.-China trade conflict and local sociopolitical unrest continued to weigh on leasing demand in Q3 2019. Net absorption registered just 25,400 sq. ft. while vacancy climbed 0.3% points to 6.5%.
- The weaker market sentiment ensured rents weakened across most submarkets. Overall office rents fell by 1.7% q-o-q, marking the deepest quarterly decline since Q1 2012. Greater Central was the worst performing district, with rents weakening by 2.9% q-o-q. Higher vacancy in Kowloon East also pulled down rents by 1.7% q-o-q.
- Occupiers have largely adopted a wait-and-see attitude, with many firms even delaying decisions around cost-saving initiatives including decentralisation. New commitments involving relocations to decentralised areas fell by 86% q-o-q.
- Chinese companies remained quiet. Agile space operators were relatively active, committing to 89,000 sq. ft. of additional space during the quarter.

Retail
- U.S.-China trade conflict and local social unrest negatively impacted domestic consumption in Q3 2019. Retail sales fell by 17.2% y-o-y in July and August combined, setting Q3 to likely register the biggest quarterly drop since Q4 1998.
- Total visitor arrivals in July and August combined fell by 22.6% y-o-y, almost ensuring Q3 to experience the largest quarterly drop since the SARS outbreak in 2003.
- Although leasing activity was sluggish in Q3 2019 as more retailers become increasingly cautious towards expansion or relocation amid the ongoing protests, the period nevertheless saw some new leases signed by fashion and cosmetic retailers.
- Overall high street rents fell sharply by 10.5% q-o-q, the biggest quarterly contraction since Q1 1998. Shopping mall rents were flat. CBRE expects overall high street rents to decline by another 5-10% over the remainder of 2019.

Industrial
- Aggregate trade value fell by 8.1% y-o-y in July and August combined. Transshipments between the U.S. and China through Hong Kong weakened by 8.4% y-o-y over the same period after two consecutive quarterly declines. The contraction in airfreight accelerated to 9.8% y-o-y in July and August combined, which makes Q3 likely to encounter the sharpest fall since Q2 2009.
- Leasing momentum continued to slow in Q3 2019 as occupiers retained their wait-and-see approach. Occupiers with less exposure to domestic and international disputes, such as data centres and beverage logistics companies. continued to support leasing activity.
- Warehouse vacancy edged down slightly by 0.1% points to 1.6%, marking the fourth consecutive quarter that vacancy has been below 2.5%.
- Rents for ramp-access buildings rose by 1.2% q-o-q while those for cargo-lift access buildings increased 0.1% q-o-q. Overall warehouse rents grew by 0.8% q-o-q. As immediate vacancy will likely remain limited, warehouse rents are therefore expected to be stable for the remainder of 2019.

Commentaries

Office

Alan Lok, Executive Director, Advisory & Transaction Services – Office Services, CBRE: Hong Kong’s Grade A office leasing momentum slowed more apparently in Q3 2019. Limited sources of demand, coupled with rising availability, is set to exert downward pressure on overall rents over the next 12 months. While Tier I buildings in Central are expected to lead the rental fall, given the rental gap between non-core areas and the CBD, decentralization remains an attractive option for many occupiers. Hong Kong East particularly is expected to remain sought after by Hong Kong Island tenants who want to upgrade their office premises with lower rents. Therefore, rents in Hong Kong East will likely edge up further despite overall market sentiment.

Retail

Lawrence Wan, Senior Director, Advisory & Transaction Services – Retail, CBRE: Unlike the Occupy Central protests in 2014, the recent turmoil had a far greater impact on retailers and landlords as the protests widespread across various districts. If the current social unrest continue, the retail market is likely to suffer from a prolonged downturn. Given the present dynamics influencing the market, short-term leases and pop up stores will remain the main source of leasing activity and retailtainment-oriented outlets such as cinemas and healthcare providers could seize opportunities to lease large spaces in desirable locations in the coming months.   

Industrial

Samuel Lai, Senior Director, Advisory & Transaction Services – Industrial, CBRE: It was a quiet period for industrial real estate investment, with less than ten deals worth over HK$77 million completed, while investors tended to focus on assets with revitalization potential. As for leasing market, the momentum continued to slow in Q3 2019 as occupiers retained the wait-and-see approach. The lack of major new supply until 2021, coupled with the withdrawal of ageing stock under the industrial revitalization scheme 2.0 will ensure vacancy remains tight. Demands for data centers, as well as temperature-controlled warehouses for healthcare products and food and beverages remain resilient due to good industry performance while warehouse rents are expected to be stable because of festive demands.

Investment

Reeves Yan, Executive Director, Capital Markets, CBRE: Geopolitical tension and local social unrest will continue to negatively affect investment sentiment in the coming months. Some Chinese buyers consider to offload assets, particularly strata-titled properties and offices, to replenish liquidity for their main businesses while affluent local investors and institutional funds are eyeing potential distressed opportunities ahead of upcoming low office supply period. The low investment yield across all property sectors will encourage investors to seek value-added opportunities instead of core assets. En-bloc office buildings and industrial premises are expected to outperform.