The combined impact of the trade war, the social unrest and COVID-19 has far reaching implications for real estate markets.
Our department heads provide a lightening review of six sectors including retail leasing, residential leasing, office leasing, industrial sales and leasing, office and retail investment and residential sales:
FIGURE 1 | Retail market left reeling from latest challenge
Simon Smith, Senior Director, Research & Consultancy:
“A hardening local situation combined with a lack of visibility is giving rise to a wide range of reactions to the current crisis from landlords and tenants. But on a more positive note, the lower rental costs will attract newcomers to the Hong Kong market, which for too long has charged the world’s highest occupational costs.”
Nick Bradstreet, Managing Director, Head of Leasing:
“History may not provide a direct comparison between this epidemic with SARS’s impact on the local economy and retail market, as post-SARS Mainland visitor numbers jumped following the introduction of the Individual Visit Scheme on 28 July 2003, which led to a structural transformation of Hong Kong’s retail sector. As far as we can see, vacancies are expected to rise over the next 6 to 12 months, which will put more pressure on rents over the rest of the year.”
FIGURE 2 | Luxury residential rent sees heavy fall
Simon Smith, Senior Director, Research & Consultancy:
“Most districts are seeing little demand in or out, and what activity there is relates mostly to downsizing as employment prospects dim. The shape of any rebound in residential rents will depend on corporate prospects in the second half and the rate at which the local economy rebounds. With so many uncertainties this is too tough to call."
Hatty Ng, Director, Residential Services:
“Given the damage being done to business prospects, many companies are cutting costs and reviewing headcount, and this has now extended to financial and professional services, traditionally a strong demand driver for luxury residential apartments.”
Teresa Chan, Associate Director, Residential Leasing:
“Leasing transaction volumes have dropped as economic activity is being widely disrupted. Whether this is a temporary hiatus or a longer-term trend is for landlords to grapple with but the lack of demand looks set to continue into the second quarter and rents are expected to consolidate further.”
FIGURE 3 | Grade A office rents plunge by 5.2%
Simon Smith, Senior Director, Research & Consultancy:
“The global spread of COVID-19, extensive travel restrictions and a stock market sell-off have undermined local office demand and taken rents down sharply in the first quarter.”
Ricky Lau, Deputy Managing Director and Head of Office Leasing:
“A coin has two sides. Some companies have taken advantage of the market adjustment to actively explore more diversified leasing options, especially companies who already intended to relocate.”
FIGURE 4 | COVID-19 disrupts local supply chain, while industrial and redevelopment projects attract developers
Simon Smith, Senior Director, Research & Consultancy:
“Warehouse vacancies are on the rise given the underwhelming trading and retail performance with the outbreak affecting both global supply chains and local retail sentiment. Nevertheless, many developers are seeing this as a golden opportunity to kick start redevelopment projects with a number of industrial sites changing hands as a result.”
James Siu, Deputy Managing Director & Head of Kowloon Industrial
“Despite the generally downbeat retail and trading news recently, investors and developers are being attracted to industrial and logistics assets for both their defensive characteristics as well as their longer-term growth potential.”
FIGURE 5 | Investment sentiment shattered by virus outbreak
Simon Smith, Senior Director, Research & Consultancy:
“While commercial investment sentiment has hit a new low, China’s cautious economic recovery, the benign interest rate environment, tight short-term commercial supply conditions and further rounds of fiscal stimulus may help to sustain price levels.”
Peter Yuen, Managing Director, Head of Investment & Sales:
“Volumes in both the office and retail investment markets are tapping new lows making price discovery problematic but deals are still being done, even in these tough market conditions. A more protracted recovery will increase the likelihood of finding distressed stock at deep discounts to 2019 peaks later in the year.”
Sharon Fong, Senior Director, Retail Sales:
“The retail market peaked in 2014 and has seen a particularly steep adjustment since then. More recently the social unrest and the virus has been a perfect storm for the sector while at the same time underlying fundamentals are being disrupted by e-commerce so even after the outbreak, investors are unsure what future we will emerge into.”
FIGURE 6 | Residential volumes test new lows
Simon Smith, Senior Director, Research & Consultancy:
“We expect volumes to continue to bear the brunt with prices enjoying a certain level of support from low interest rates and low levels of new completions. Some selective distressed selling has been in evidence.”
Patrick Chau, Senior Director, Residential Development and Investment:
“We have seen some distressed selling but cases are rare at this stage. Areas traditionally popular among mainlanders have seen prices fall most but elsewhere values are holding up remarkably well.”
Keith Chang, Senior Director, Realty Investment
“It is still very difficult to predict how the epidemic will unfold but for now negative real interest rates, limited new luxury supply and the possibility that government could relax previous measures is giving landlords reason to hope.”