Hong Kong, January 14, 2021 – The U.S.-China trade conflict, sociopolitical unrest and COVID-19 pandemic have weighed heavily on Hong Kong’s economy and real estate market over the past 24 months, according to CBRE in its annual market review and outlook for Hong Kong. While conditions are set to remain challenging in 2021, particularly in the first six months of the year, CBRE sees reasons for cautious optimism as Hong Kong looks to recover from its longest recession since 2009.
Marcos Chan, Head of Research, CBRE Hong Kong: “The Hong Kong economy has shown signs of improvement in Q4 2020, owing to a low base of comparison. Supported by a solid economic rebound in Mainland China, Hong Kong is on the road to recovery. While the prolonged pandemic and the absence of cross-border visitors will continue to create strong headwinds in the early part of 2021, the expected launch of a local vaccination programme in February should restore business confidence. We shall see global and local economic activity to gradually pick up, perhaps more noticeably in H2 2021. The eradication of the local pandemic should eventually lead to a resumption of cross-border travel – a scenario essential to Hong Kong’s economic rebound. Global geopolitical risks, however, will remain as uncertainties for both corporates and investors.”
Review and Commentaries
Grade A Office
- Office leasing momentum weakened further in Q4 2020 following the reintroduction of measures to contain the fourth wave of local COVID-19 infections.
- Full-year net absorption registered -2.2 million sq. ft., the largest decline on record. All major submarkets have recorded negative net absorption, with Greater Central registered the largest occupancy contraction (-840,000 sq. ft.).
- Overall vacancy continued to climb to 9.9%, the highest since Q2 2009, with the underlying 8 million sq. ft. of vacant space as of end-2020, the highest since December 1999.
- Tsim Sha Tsui saw the largest jump in vacancy rate through the year, climbing 4.6-ppt to 9.2% at end-December. Greater Central ended the year at 7.3%, up from 3.4% from a year earlier.
- Overall rents declined by 4% q-o-q in Q4 2020, bringing the annual decline to -17.4% y-o-y in 2020. Across the major submarkets, rents fell the most in Wan Chai/Causeway Bay in 2020, leaving the full-year decline at -20.1%, followed by Greater Central (-19.9%) and Tsim Sha Tsui (-17.6%). Hong Kong East was the best performing submarket, with rents declining by a relatively mild 8.3%.
- MNCs are expected to remain overall cost cautious in 2021. Expansion demand will likely remain thin.
- Pent-up demand from recent IPOs will likely translate into improving leasing momentum in H2 2021. Chinese corporates are expected to become more active this year, provided the pandemic is brought under control and travel restrictions are removed.
- High availability of vacant space will ensure further rental pressure across submarkets. CBRE expects Grade A office rents to decline by another 5% across major submarkets in 2021.
- The narrowing rental gap between core and non-core submarkets will continue to curtail decentralisation activity in 2021. However, new decentralised projects scheduled to come on stream in 2022/2023 are expected to attract major occupiers with upcoming lease expiries and upgrading needs. Pre-leasing activity in new supply will gradually gather momentum as the economy recovers.
Alan Lok, Executive Director, Advisory & Transaction Services – Office Services, CBRE Hong Kong: “The first half of 2021 will likely see office rents trend down further as high vacancy continues to struggle landlords amidst limited new and expansion demand. The market should see a pick-up in leasing demand from Chinese firms as fund raising activity continues to flourish. A full resumption of cross-border people flow, however, is crucial to support a rally in such leasing activities.”
Ada Fung, Executive Director and Head of Advisory & Transaction Services – Office Services, CBRE Hong Kong: “Many large corporations will continue to closely monitor space utilisation as the local pandemic is gradually radiated. This data will help decision makers formulate long-term office strategies. In the coworking segment, established operators are set to continue to grow their market share but newer and smaller players will remain in wait-and-see mode due to the high availability of ordinary space for lease.”
Grade A Office | Q4 2020 |
Full-Year 2020 |
Q4 2020 |
Q3 2020 |
Q4 2020* |
Full-Year 2020 |
Net Absorption (Sq. ft.) | Vacancy | Rental Change | ||||
Overall | -245,100 | -2,200,000 | 9.9% | 9.6% | -4.1% | -17.4% |
Central | -50,400 | -573,100 | 6.7% | 7.3% | -5.8% | -19.8% |
Wanchai, Causeway Bay |
-74,400 | -375,200 | 8.7% | 8.0% | -3.6% | -20.1% |
Tsim Sha Tsui | -82,600 | -521,500 | 9.2% | 8.5% | -1.7% | -17.6% |
Hong Kong Island East |
-101,100 | -232,200 | 5.9% | 4.8% | -3.9% | -8.3% |
Kowloon East | 70,600 | 27,800 | 15.0% | 15.4% | -1.9% | -15.8% |
(*) q-o-q
Retail
2020 Review
- Travel restrictions and further tightening in social-distancing measures continued to struggle Hong Kong’s retailers and F&B operators in Q4 2020.
- Leasing demand continued to be coming from retailers selling daily necessities. Several facemask sellers capitalised on high vacancy along prime streets to establish pop-up stores. These and other short-term leases helped pull down vacancy on tier-I streets in the four core retail districts to 15.7%. Vacancy in Tsim Sha Tsui was the highest, standing at 18.8% at year-end.
- Overall high street rents fell by 8.9% q-o-q in Q4 2020, bringing the full-year decline for 2020 to -27.2%, the sharpest annual fall on record. Shopping mall rents were stable as developers invested in marketing and other promotional campaigns to support tenants. The full-year decline stood at -5.6%.
- As anti-pandemic measures remain in place, retail leasing demand is expected to remain limited in H1 2021. Street shop vacancy in prime retail districts will stay high for longer.
- Should an effective vaccination programme will bring the local pandemic under better control, cross-border people flow may gradually resume later in 2021, facilitating a retail market recovery in H2 2021. Leasing demand is expected to rally in due course.
- The rental decline for high street shops in core shopping districts is forecasted to be milder than that witnessed in 2020, with a fall of another 5%-10% expected.
Lawrence Wan, Senior Director, Advisory & Transaction Services – Retail, CBRE Hong Kong: “No significant improvement in retail leasing demand is expected for the short-term future. Sources of leasing demand will still be coming from local-oriented retailers. Retailers of tourist-oriented and discretionary items, however, may start paying attention to leasing opportunities, capitalising on the low rents and get ready for a potential retail market recovery later in the year. We also expect some services trades such as elderly homes and medical clinics to be more active in hunting for space in neighbourhood locations.”
High Street Shops in Core Districts |
Q4 2020 |
Q3 2020 |
Q4 2020* |
Full-Year 2020 |
Vacancy | Rental Change | |||
Overall | 15.7% | 18.3% | -8.9% | -27.2% |
Central | 14.9% | 18.9% | -7.4% | -26.1% |
Causeway Bay | 15.8% | 22.4% | -8.6% | -26.9% |
Tsim Sha Tsui | 18.8% | 17.4% | -11.1% | -28.3% |
Mong Kok | 14.9% | 16.6% | -7.8% | -27.2% |
(*) q-o-q
Industrial
2020 Review
- Hong Kong’s trade performance improved in Q4 2020 despite the worsening pandemic in many major economies.
- Leasing momentum for industrial properties, however, remained slow. Cost-saving was the main driver of new leases, with demand led by e-commerce platforms and healthcare-related occupiers.
- Warehouse vacancy fell by 0.6% points q-o-q to end the year at 3.6%. However, space availability may rise in the early months of 2021 as spaces are released to the market.
- Overall warehouse rents edged down by 0.4% q-o-q, bringing the full year decline to 6.8%, the sharpest annual fall since 2002.
- Solid rebound of the Chinese economy will ensure improved goods flow in and out of Hong Kong.
- Global trade demand is also set to recover in H2 2021 as vaccines bring the global pandemic under better control.
- Weak retail momentum is set to persist until cross-border travel resumes. Warehouse demand from retailers will be limited for the duration of H1 2021. Instead, rapid online shopping growth will spur stronger logistics demand from e-commerce operators.
- In addition to boosting online purchases of household goods, the pandemic has also led to a surge in deliveries of fresh food and groceries. This has generated robust demand for cold storage, with such facilities set to remain a keenly sought-after asset class in 2021.
Samuel Lai, Senior Director, Advisory & Transaction Services – Industrial & Logistics, CBRE Hong Kong: “The industrial property market is expected to see improved momentum in 2021 as global trade activity picks up and as retailers and tech and telecom firms continue to expand their online capabilities. Redevelopment of industrial buildings will also continue to ensure relocation demand. Low vacancy as compared to other commercial property sectors is set to limit rental pressure in 2021.”
Industrial & Logistics |
Q4 2020 |
Q3 2020 |
Q4 2020* |
Full-Year 2020 |
Vacancy | Rental Change | |||
Warehouse | 3.6% | 4.2% | -0.4% | -6.8% |
(*) q-o-q
Capital Markets
2020 Review
- Hong Kong’s bank aggregate balance continued to climb in Q4 2020 and reach a record high of HK$457 billion at the end of 2020, 7.4 times the level a year ago.
- Commercial property investment volume (deals worth over HK$77 million, excluding pure land or related transactions) rose to HK$32.7 billion in Q4 2020, underpinned by the sale of Cityplaza One and Goldin Financial Global Centre, which collectively fetched HK$23.8 billion. The strong end to the year brought full-year transaction volume to HK$52.9 billion, a decline of 23% y-o-y from 2019.
- Neighborhood shopping arcades continued to be sought after with a portion of Shaukeiwan Centre and the retail podium of Downtown 38 in To Kwa Wan being sold during Q4 2020.
- While developers retain a cautious attitude towards acquiring land in locations lacking strong occupier demand, bidding for residential sites remains highly competitive.
- The recent removal of the Double Stamp Duty (DSD) for commercial properties will provide the investment market with a much-needed boost in 2021.
- Smaller assets will see relatively stronger activity owing to lower purchasing barriers for private individual investors and corporate end-users.
- Despite climbing vacancy and falling rentals, some long-term investors are capitalising on discounted prices in the office sector.
- Office and industrial capital values are expected to reach the trough and stabilise as the rental downcycle comes to an end.
Reeves Yan, Executive Director, Head of Capital Markets, CBRE Hong Kong: “Ample liquidity, low interest rates and the higher chance to see rents bottoming out will prompt investors to become more active in 2021. We expect investors to target assets catering to fast-growing business sectors such as technology, telecoms, F&B, pharmaceuticals, elderly care and education. Property types including data centres, cold storage and commercial podiums that can accommodate these industries will be keenly sought after this year. We also expect to see more Chinese capitals in the investment market this year as the RMB strengthens.”
Capital Markets | Q4 2020 |
Full-Year 2020 |
Q4 2020* |
Full-Year 2020 |
Capital Value Change | ||||
Transaction Volume# |
HK$32.7 billion |
HK$52.9 billion |
N.A. | N.A. |
Grace A Office (Stratified) |
N.A. | N.A. | -4.2% | -24.6% |
High Street Shops in Core Locations |
N.A. | N.A. | -4.9% | -33.8% |
Warehouse | N.A. | N.A. | Flat | -6.1% |
(#) Deals worth over HK$77 million
(*) q-o-q
Follow us on Twitter: @cbrehongkong
And on LinkedIn: company/cbre-asia-pacific
Disclaimer:
Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2020 revenue). The company has more than 100,000 employees serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at https://www.cbre.com.