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News Release

Shanghai

Two Distinct Halves in the First Six Months of 2009


After experiencing a sharp plunge in late 2008 and earlier in 1Q09, the Hong Kong property market has started to show signs of recovery in 2Q09. Although leasing demand and rents have inevitably shrunk since the financial downturn, the trend started to taper off in recent months.  At the same time, low holding costs, improved market liquidity and a reviving stock market have stimulated another wave of investment demand in the sales market with capital values and transaction volume rebounding strongly in most of the property sectors, according to Jones Lang LaSalle at its Mid-Year Property Review today.

Office Market

Under the shadow of the economic downturn, most core markets experienced negative net take-up due to weaker demand and tenants’ relocation to the more affordable buildings in the non-core markets. Among these markets, Central and Wanchai / Causeway Bay recorded the greatest net withdrawal during 1H09. Non-core markets painted a different picture with relatively strong take-up during the first half of the year, mainly due to the realisation of pre-commitments in many newly completed buildings especially those in Kowloon East.

The core markets continued to see rising vacancies due mainly to the further softening of leasing demand and returning stock from decentralising tenants. Central, for instance, saw its vacancy rate trended up from last December’s 3.4% to the current 4.6%; while Wanchai / Causeway Bay rising from 2.9% to 4.8% over the same period. On the other hand, the non-core markets of Kowloon East continued to benefit from flight-to-quality tenants, leading to falling vacancies, from last December’s 27.3% to the current 22.2%.

Rents have fallen drastically in 1H09, down 29% in the Overall market and 35% in Central. However, the rental decline decelerated in 2Q09, with landlords becoming less panic in recent months. The majority of market activity was for cost-saving purposes, although there were also saw some expansion requirements as tenants leveraging on the lower rentals. ‘Sentiment improved notably since the second quarter and we saw rental decline slowing in the last two to three months. Although cost-sensitive tenants continued to relocate to the more affordable options in Kowloon East, that has not created any disorder to the core-area markets,’ said Gavin Morgan, International Director and Head of Markets at Jones Lang LaSalle.

‘Although rental decline is decelerating, the economy is not likely to show significant improvement in the near future; companies are expected to stay cautious towards expansion and space requirements in 2H09. Flight-to-quality and cost-saving relocation will remain the key trend in the next six months. Vacancies in the core markets will continue to trend up, while rents will face further downward pressure between now and the end of 2009, though probably by a lesser magnitude,’ concluded Mr. Morgan.

Hong Kong Prime Office Indicator - % Change

Sub-Market
Capital Value(1H 2009) 
Rental Value(1H 2009)
Vacancy Rate(End of Jun 2009)
Overall 
-1.3%
-29.0%
7.3%
Central
-1.9%
-35.5%
4.6%
Wanchai / Causeway Bay 
-2.7%
-27.0%
4.8%
Hong Kong East 
+4.1%
-13.2%
3.3%
Kowloon East 
-3.1%
-12.5%
22.2%
Tsimshatsui
+1.1%
-13.6%
5.4%

Retail Property Market

Hong Kong’s total retail sales fell by 4.4% y-o-y  in the first five months of 2009, a combined result of deteriorating private consumption expenditure (down 5.5% y-o-y in 1Q09) and falling visitor arrivals (down 1.4% y-o-y in the first five months of 2009).

Retailers were generally cautious towards expansions in 1H09, although selective trades like jewellery and watches continued to seek for spaces. Overall rents of high street shops fell by 4.9% in 1H09, with the sharpest fall in Central at 11.4%. This was mainly due to the higher base of comparison as Central’s rents saw the highest increase during the last upcycle. On the other hand, rents for prime shopping centres and premium prime shopping centres were relatively stable, falling 2.9% and 0.7%, respectively during 1H09.  In line with the other property sectors, the retail property market saw milder rental decline in 2Q09 than in 1Q09.

While rentals were pointing back to the right track, capital values of high street shops also saw a notable rebound in 2Q09, rising 10.5% q-o-q through April to June, after falling by 6% in 1Q09.  For the year-to-date, capital values of high street shops increased by 3.9% in 1H09.

‘The prevailing concern over job security will continue to keep consumer confidence and local consumption at low levels in 2H09. On the other hand, both business and leisure travel will unlikely  see a quick rebound in the immediate future, making sure that Hong Kong’s tourist consumption market will remain subdued for a while longer. The second half of 2009 will likely see landlords continue facing pressure from retailers, which will lead to further rental decline. However, a drastic correction is unlikely and we expect rents will only edge down a few percentage points from the mid-year levels,’ commented Jeannette Chan, Regional Director of Sandalwood, a Jones Lang LaSalle company in affiliation with Colonial First State Property Management.

Hong Kong Prime Retail Indicator - % Change

Sector
Capital Value (1H 2009)
Rental Value (1H 2009)
High Street Shops 
+3.9%
-4.9%
Overall Prime Centres 
n/a
-2.9%
Premium Prime Centres 
n/a
-0.7%

Residential Market

The residential market has proven to be exceptionally robust in 2Q09, with capital values and transaction volume rebounding strongly from their troughs in the first quarter. The combined effect of ultra low finance and holding costs, near-zero savings rates, improved liquidity and stock market rebound helped push investment sentiment up over the recent months.  The number of residential sales and purchase agreements hit a 17-month high to reach 13,805 in June, a big rebound from the record low of 3,264 in November last year. The first half of 2009 saw a total of 51,913 residential sales transactions, still 20% below the level a year earlier.

Demand for luxury properties was also strong, with the total number of transactions for properties priced at over HKD20 million reaching 750 in 1H09, up significantly from the 312 registered in 2H08. These properties fetched a total consideration of HKD27.7 billion in 1H09, compared to the HKD19.7 billion recorded in 2H08.

2Q09 saw luxury residential capital values rebounding by 18.5% q-o-q, after falling by 2.3% in 1Q09; bringing the year-to-date growth to 15.8%.  The mass market saw an even stronger rebound of 23.7% q-o-q in 2Q09, bringing the year-to-date growth to 26.1%.

The leasing market for luxury properties also stabilised since 2Q09, with rents holding largely flat through April to June. For the first half of 2009, luxury residential rents fell by 9.6%.

Hong Kong Prime Residential Indicator - % Change

Sector
Capital Value (1H 2009)
Rental Value (1H 2009)
Luxury
+15.8%
-9.6%
Mass
+26.1%
N/A

‘The low interest environment is likely to continue for the rest of 2009, holding the positive-carry situation. There is no reason for investors to sell their properties at discount, given the prevailing low holding costs. However, buyers will become increasingly cautious as they see the economy and property market not heading in the same direction. A slowdown in capital value growth is possible after the sharp rise in 2Q09, yet a correction is unlikely. We expect capital values in both the mass and luxury markets to edge up a further 5-10% in 2H09 while rents for luxury properties will remain largely stable,’ commented Joseph Tsang, International Director and Head of Residential at Jones Lang LaSalle.

Industrial Market

The external trading environment continued to worsen through 1H09 with Hong Kong’s imports and exports dropping by 20.8% and 19.5% y-o-y, respectively, in the first five months of 2009.  On the other hand, the city’s air freight and sea freight volume also saw a substantial decline, falling 21.1% and 19.7% y-o-y, respectively, over the same period.  The sluggish demand from logistics operators coupled with weaker retailers’ demand for storage space have led to falling warehouse rents, down 5.9% in 1H09.

‘The external trading environment will remain challenging and trade volume is expected to remain on the fall in 2H09. Although signs of economic recovery in China may help provide some support to Hong Kong’s external trade performance, logistics operators and local retailers will remain cautious towards expansion and warehouse space requirements until they see a more sustainable economic rebound globally. In general, tenants will continue to look for cost-saving options while landlords in the core locations will continue to face competition from the decentralised buildings. However, the tight supply situation in the warehouse market will prevent rentals from falling too drastically,’ said Marcos Chan, Head of Research, Greater Pearl River Delta, Jones Lang LaSalle.

Hong Kong Warehouse Indicator - % Change

Sector
Capital Value (1H 2009)
Rental Value (1H 2009)
Warehouse
-3.3%
-5.9%

Investment Market

The investment market saw two distinct halves in 1H09. After staying slow for two consecutive quarters since the financial market crisis last year, 2Q09 saw a notable rebound in investment demand across most of the property sectors. Improved liquidity, influx of hot monies, low finance costs and stock market rebound, all helped to regain investors’ confidence.

In the commercial markets, Grade A office properties were particularly sought after, with a total of 17 transactions of over HKD100 million being recorded in 1H09, 14 of which were registered in the second quarter. The retail market, particularly high street shops, was also active with 26 transactions of over HKD100 million being registered in 1H2009.

The second quarter also saw a notable rebound in capital values across all property sectors. In the Grade A office market, capital values for some of the strata-titled buildings in Central, for instance, have seen some 30-40% rebound in 2Q09.

‘It is worth noting that most of these transactions were dominated by local investors or end-users who took the chance to invest now on the back of released market liquidity and low financing costs. However, after a few months of transactions volume and capital value run-up, investors will become increasingly cautious and it will be no doubt to see the investment market consolidating in the few months ahead,’ commented Warren Liu, Head of Investment at Jones Lang LaSalle.

Outlook

‘The second half of 2009 will likely see the property market entering into a consolidation phase, after a strong run-up in capital values and sales volume in recent months. However, interest rates are expected to stay low for the rest of the year, which will give no excuse to landlords to fire sell their property holdings. In addition, the supply side of the equation remains healthy across all property sectors and this will not only minimise the chance of a drastic correction in property prices, but also help strengthen the fundamentals of Hong Kong’s property market in the medium run,’ concluded Marcos Chan.