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News Release


JLL revises office rental forecast for 2015

Central office rents to grow by up to 15%

Macau7 July 2015 – Hong Kong's Grade A office market recorded the strongest improvement in the first half and outperformed the other property sectors, thanks to robust leasing demand from the Banking and Finance industry and Mainland Chinese companies. In view of the better-than-expected performance of the market, JLL Hong Kong has revised the rental growth forecast for Central from 0-5% to 10-15% in 2015, according to its Mid-year Property Review 201published today. 

New home sales stayed active in the first half, buoyed by pent-up demand and competitive sales strategies adopted by developers. Rents of warehouses continued to grow in the first half, but are expected to moderate in the second half in face of increasing headwinds on the external front. The retail leasing market continued to soften as the slowdown in Hong Kong visitor arrivals and changing shopping patterns of Mainland Chinese tourists continued to affect retail sales.

Retail Market

Hong Kong visitor arrivals through January-May grew by a mere 3.9% year-on-year, a marked slowdown from the 12% growth recorded in 2014. Visitors from Mainland China grew by just 5.9% year-on-year, compared with a 16% growth in 2014. With Shenzhen residents applying for multiple-entry permits being restricted to once-a-week visits to Hong Kong starting from mid-April, visitor arrivals from Mainland China is expected to further weaken, putting additional pressure on the Hong Kong retail market.

Constrained by the weaker performance of inbound tourism, total retail sales growth declined 1.8% year-on-year in the first five months of 2015, against average growth of 11% per year over the past 10 years. Spending on jewellery and watches continued to fall, affected by the anti-corruption campaign in Mainland China and the shifting pattern of Mainland Chinese shoppers away from luxury goods and further towards mass market products. The strength of Hong Kong dollar against other global currencies, such as the Yen, has also made other global shopping destinations more enticing.

The lacklustre retail sales performance had a greater impact on High Street Shops, where rents dropped by 6.7% in the first half of the year after retreating by 0.6% the second half of last year. The decline in rents was significantly stronger on the most expensive shopping streets, such as Russell Street and Queen's Road Central, as big-ticket item retailers scaled back their footprints. Shops on fringe streets with higher vacancy rates were under the greatest rental pressure with landlords being more willing to lower asking rents. In contrast, the sustained demand enjoyed by Prime Shopping Centres resulted in rents edging up by 0.7% over the same period.

Tom Gaffney, Head of Retail at JLL Hong Kong, said: "The ongoing crackdown on corruption in Mainland China and changing profile and shopping habits of Mainland tourists, along with the once-a-week visit restrictions, are all expected to continue to weigh on retail sales in the second half of the year. As a result, street shop rents will continue to decline over the near-term. International retailers, however, remain keen on Hong Kong given its mature retail market. As rents decline, some of the most expensive shopping streets in Hong Kong will see a gradual change in the tenant mix creating, what we hope will be a more sustainable retail landscape. More local retailers, fast fashion and lifestyle store operators will likely take advantage of the opportunities to secure shops in prime shopping locations as watch and jewellery groups scale back their footprints."

"We expect High Street Shop rents to drop by 15 to 20 percent this year. Rents for prime shopping centres, however, will grow by up to 3% because retailers still show a strong preference towards shopping centres," he added.


Hong Kong Prime Retail Indicator – % Change


Capital Values

(1H 2015)


(1H 2015)

2015 Rental Forecast
High Street Shops-5.5%-6.7%-15–20%
Prime Shopping Centres+0.7%+0.7%+0–3%


Residential Market

The residential market saw home sales in the first half grow by 20.4% year-on-year, reaching a monthly average of 5,377 transactions, which was largely on par with the level recorded in 2014. Sales momentum in the primary market continued to be driven by pent-up demand from end-users despite the Hong Kong Monetary Authority's lowering of the maximum loan-to-value ratio for properties priced below HKD 7 million from 70% to 60% in February. Sales of new homes surged 28.9% year-on-year through January-May, with most new launches being well-received and achieving close to 100% sales rate. In the secondary market, home sales decreased by 22.3% year-on-year in April-May, after the mortgage tightening measures were implemented.

In the primary market, developers continued to offer discounts and incentives to attract the interest of buyers, setting prices largely on par with homes in nearby secondary markets. Developers launched about 6,500 new flats for sale in the first half of the year and are expected to launch about 12,000 flats in the second half.

Preliminary data shows 54 properties—38% more than the 39 deals recorded a year ago—over HKD 100 million sold in the first half. The average transaction size for properties priced over HKD 100 million increased from HKD 277 million in the second half of 2014 to HKD 296 million in the first half of 2015.

Capital values in mass residential market grew by 6.5% in the first half and were up 13.6% year-on-year. Growth was supported by the release of pent-up demand and strong sales at new launches. Capital values of luxury residential properties also gathered momentum in the second quarter, fuelled by record-breaking transactions in the market. Prices of luxury flats grew by 2.5% in the first half and 6.4% year-on-year.

In the leasing market, luxury property rentals grew by 3.0% in the first half, gathering momentum in the second quarter; the 1.6% growth recorded in the second quarter; the strongest quarterly advance in three years. Growth was largely fuelled by growing demand from the city's corporate sector and improved leasing activity on Hong Kong Island.

Joseph Tsang, Managing Director and Head of Capital Markets at JLL Hong Kong, said: "Pent-up demand will continue to fuel sales in the primary residential market through the remainder of 2015, especially in the mass residential market. Since the completion of flats will increase from about 13,000 this year to an average of about 20,000 flats per year in the coming two years, developers will need to continue to offer discounts and competitively set prices for new launches as competition steadily increases. The full impact of any potential interest rate hike will depend on the magnitude of the increase. Still, we expect capital values of luxury flats to rise by about 5% this year, while mass residential will rise by about 10%."


Hong Kong Prime Residential Indicator – % Change


Capital Values




2015 Capital Values Forecast2015 Rental Forecast


Office Market

Net take-up in the overall Grade A office market reached 2.1 million square feet in the first half of 2015. Excluding pre-commitments in newly completed buildings, net take-up still amounted to 977,600 square feet; exceeding the 724,000 square feet achieved in 2014.

The Central Grade A office market recorded net take-up of about 483,000 square feet in the first half, largely driven by expansion and relocation requirements from the banking and finance sector. A significant portion of net take-up in Central was realised at Citibank Plaza, where the vacancy rate dropped from 19.8% at the start of the year to just 2.8% by the end of June.

The Shanghai–Hong Kong Stock Connect pilot programme along with recently announced plans to broaden cross-border investment channels between the Mainland and Hong Kong continued to serve as a catalyst for growth. Mainland financial services and securities trading firms looking to set up offices in Hong Kong were among the most active in leasing market, representing about 40% of net take-up and about 30% of all leased floor space in Central throughout the first six months of the year. Insurance companies and smaller foreign banks also continued to expand their footprints in the city.

Vacancy rates declined across all submarkets in the first half with the exception of Kowloon East, where new supply lifted the vacancy rate up slightly. As at the end of June, the vacancy rate in Central had tightened to 1.7%, its lowest level since the onset of the Global Financial Crisis. The vacancy rate in the overall market was down to 3.5% by the end of June.

The tight vacancy environment bolstered the rental expectations of landlords. Rents in all major office submarkets recorded positive growth throughout the first half. Rents in Central outperformed all other submarkets, surging 7.0% in the first half as vacancy dropped, reaching an average of HKD 96.7 per square foot per month (NFA) at the end of June.

Paul Yien, Regional Director of Markets at JLL Hong Kong, said: "The performance of the Grade A office market exceeded expectations in the first half. Looking ahead, leasing activity should be able to hold up despite the moderate outlook for the city's economy. With vacancy rates having tightened so quickly, we have revised our rental growth forecast for Central from 0–5%, to a range of 10–15% for the whole year. Although rents in Kowloon East edged higher in the first half of the year, they are likely to come under increasing pressure given the mounting supply side competition arising from refurbished industrial buildings and a significant amount of shadow space set to return to the market over the next 12-months."


Hong Kong Prime Office Indicator – % Change


Capital Values




2015 Rental Forecast
Wanchai/Causeway Bay+1.1%+2.3%+0-5%
Hong Kong East+1.1%+1.2%+0-5%
Kowloon East+2.6%+1.6%-0-5%


Industrial Market

The continuing slowdown of the Mainland China economy saw Hong Kong's external trading sector turn negative in the first half. Through January-May, total exports grew by just 0.7% year-on-year while imports dropped 0.8% year-on-year. Over the same period, airfreight volumes at Hong Kong International Airport grew by 1.5% year-on-year but container throughput at the city's port plunged by 9.4% year-on-year.

With the external trading and local retail sectors in decline and warehouse rents still at record-high levels, leasing activity slowed noticeably in the first half as occupiers kept expansion plans at bay. Third-party logistics (3PLs) were among the most active occupiers in the leasing market, accounting for about 76% of all leasing transactions. 3PLs, however, were selective in leasing properties owing to thinning profit margins. Cargo lift access warehouses benefited from the stronger interest from occupiers searching for cost-effective space.

Local 3PL Wilson Logistics lease of Kowloon Godown in Kowloon Bay in its entirety contributed to the overall vacancy rate dropping from 4.2% at start of the year to 2.2% by the end of June. The tight vacancy environment across the industrial property market supported rents of warehouses, I/Os and Flatted Factories to trend higher in the first half; up by 4.7%, 3.2% and 4.6%, respectively. Growth, however, was at a slower pace than in the second half of 2014. Despite the tight vacancy situation, rental growth in the warehouse market continued to be hindered by the difficulties faced by 3PLs in passing higher rental costs onto their clients while rental growth in I/Os and Flatted Factories were capped by increasing competition from industrial refurbishment projects.

Ricky Lau, Head of Industrial Department at JLL Hong Kong, said: "Hong Kong's external trading sector is expected to face increasing headwinds in 2015 given the ongoing weakness in global trade markets and slowing Mainland Chinese economy. As a result, warehouse rents are expected to grow at a more moderate pace in the second half. We are forecasting warehouse rents to grow by 5-10% in 2015. Increasing competition in non-core area office markets is likely to see rental growth in I/Os and Flatted Factories trail warehouses."

Hong Kong Warehouse Indicator – % Change


Capital Values




2015 Rental Forecast


Investment Market

The investment market remained largely subdued in the first half owing to record-high prices and compressed property yields. The total value of investments across all commercial asset classes amounted to HKD 19.1 billion, 33% less than the HKD 28.6 billion recorded in the first half of 2014.

In the office sector, a handful of record-breaking transactions were recorded. A whole floor at 9 Queen's Road Central in Central was sold for HKD 480 million or HKD 34,861 per square foot (gross), setting a new record for the Hong Kong office market, in terms of unit price. Looking ahead, the recovery of the Central leasing market will potentially draw some buyers back into the investment market.

In the retail sector, the market focus continued to be on properties in non-core and emerging areas with value-add potential. However, with street shop rents falling and the sector facing an uncertain outlook, investor interest for retail properties remained subdued, further broadening the correction in capital values in street shops. The sales of retail properties over HKD 100 million decreased by 40% year-on-year, with total consideration down 41% year-on-year to HKD 6.1 billion in the first half.

Capital values of industrial properties continued to outperform the rest of the market, bolstered by end-user purchases and transactions involving smaller lump sum payments.

Tsang said: "Given where prices and yields are currently at, any larger office or industrial transactions concluded in the second half will likely be dominated by end-user purchases for long-term investment. We will likely see more interest in industrial properties ahead of the expiry of the government's revitalisation scheme. We expect capital values of warehouse properties to grow 10–15% this year while capital values of Grade A offices will grow 0–5%. However, capital values of High Street Shops will likely drop 15–20% amid a worsening retail climate."


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