• The local market is in a state of suspended animation with few office transactions and bleak retail sector
• Discrepancies between asking prices and buyers’ expectations remain significant
• Investors continue to wait and see or look overseas for opportunities in Singapore, Sydney, New York and Los Angeles
Hong Kong – 17 Oct 2019 Prominent real estate advisor Savills pointed out in its Q3 Investment Briefing that a volatile economic and social backdrop saw non-residential transaction volumes collapsing by 57% in July and August following a 48% YoY decline in the first half of the year. Local disruption is compounding the negative consequences of the trade war and hitting commercial volumes hard, but retail prices only adjusted mildly compared to the dramatic decline in retail rents; while the office sector saw a rapid decline in buyer appetite.
The few office transactions recorded over Q3 were driven by either family sales, or long-term holdings offered at modest discounts, or both. The Kowloon office market also saw a marked decline in office transactions with potential buyers looking for a 15% to 20% discount, rare even in this market. Elsewhere transactions were hard to come by with some deals falling through during the due diligence process due to the weak market sentiment. Under such circumstances, some landlords have softened their stance on asking prices, but discrepancies with buyers’ pricing levels are still significant, so volumes may remain low for some time. Grade A office prices declined by 2.9% over Q3 as a result, with Tsim Sha Tsui falling the most (-5.9%), followed by Central (-4.5%), Kowloon East (-2.8%) and Kowloon West (-1.6%). Wanchai / Causeway Bay and Island East office prices remained flat.
The retail sector was the hardest hit by recent social unrest with first street shops and then shopping centres in most areas affected. While rental concessions (including temporary rental reductions and additional rent-free periods) were offered by various mall landlords, street shops saw an increasing number of vacant shops even with rental reductions, in particular in core retail areas where protests have been most common. As such most retail investors adopted a cautious attitude with very few transactions concluded other than the odd collective sale or bargain deal. Other than such outliers where vendors might face financial difficulties, most retail landlords are veteran investors and much more financially sound. While we saw prime street shop rents declining dramatically by 17% in Q3, prices only adjusted by 5% over the same period (Central: -4.1%; Causeway Bay: -5.8%; Tsim Sha Tsui: -5.3%; Mong Kok: -3.2%).
Despite the latest drawback, the Government was still confident enough to launch the topside commercial development of West Kowloon Terminus for tender in Q4 as a single lot.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “The few transactions recorded in the commercial investment market last quarter were either family sales, evidenced by our transaction of a majority share of Winway Building, or long-term holdings of over 20 to 30 years which have seen substantial gains. The outlook for the sector looks grim with no immediate resolution to both internal and external issues.”
Mr. Peter Yuen, Managing Director, Head of Investment & Sales said: “As we can see, with the business environment becoming more challenging any sustained period of vacancy might test commercial landlords’ willingness to maintain asking prices, and on current evidence office landlords seem more receptive to price reductions than their retail counterparts. If global and local economic conditions continue to worsen, we may see more price adjustment over the next few months, and possibly a heavier fall in the office sector than in the retail sector.”