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News Release

Hong Kong and Macau

Jones Lang LaSalle: Clear signs of recovery in 2009 with strong capital values growth across market

The compounded effect of low interest rates, high global liquidity, stock market rally and tightened supply drove investment demand and capital values high across most of the property sectors in 2009.  As the economy continues to improve, the property market is expected to continue running on this rising trend in 2010, according to Jones Lang LaSalle’s Hong Kong Annual Property Review.
Office Market
The aftershocks of the financial tsunami have resulted in many companies consolidating, leading to weak new letting demand and negative net take-ups in the Grade A office leasing market.  Kowloon East, which benefited from the decentralisation trend offering cost-sensitive tenants with affordable, high quality Grade A offices, was the only major sub-market that saw a positive net take-up in 2009.  Central and Hong Kong East saw negative take-ups in the first 3 quarters of the year, but started to turn positive entering 4Q. As at the end of November 2009, the overall vacancy rate of the overall Grade A office market was at 7.0%.
Office rentals, after falling for four consecutive quarters since 4Q08, started to stabilise in 4Q09.  In the first 11 months of 2009, rents in the overall market fell by 30.3%.  However, closer inspection reveals that the fall has already narrowed down significantly from the 29% drop recorded in 1H09 to a decrease of just 1.8% in 2H09.  In view of stabilising vacancy rates and gradual improvement in both the local and global economies, landlords showed less panic and some started to raise rentals towards the end of 3Q09, in particular for strata-titled buildings. In fact, a mild growth of 1% has been recorded in 4Q09 so far, suggesting that the rental down cycle might have come to an end.   
While office rentals continued to fall across most of 2009, the sales market was extremely hot. Capital values of Grade A office space, which fell drastically in 1Q, managed to experience a strong rebound in 2Q and 3Q.   Overall capital values of Grade A office went up 9.4% in 2009.
‘As the macro environment gradually improves, it will help fuel expansion demand for 2010. Indeed, the market has started to see some mild expansion demand in Central entering 3Q09 and 4Q09, mainly from the banking and finance sector.  However, we do not expect to see very aggressive expansion plans in this early phase of economic recovery, but Central tenants will show less resistance towards lease renewals in 2010 as rentals are already back to more affordable levels. That said, the returning spaces in Central and Wanchai / Causeway Bay, if not leased before expiry, will impose some pressure on landlords and limit rental growth potential.  In Kowloon, the new developments in Kwun Tong and Kowloon Bay will continue to offer cost-sensitive tenants value-for-money spaces, building a more sustainable platform for Hong Kong's overall Grade A office leasing market.  Overall, we believe the worst time has gone and will likely see a relative stable leasing market in 2010.’ said Gavin Morgan, International Director and Head of Markets, Hong Kong.
Hong Kong Prime Office Indicator - % Change
Capital Value (2009 Full-Year) *
 Rental Value
(2009 Full-Year) *
Vacancy Rate
(November 2009)
+10.1% -35.7% 4.6%
Wanchai / Causeway Bay 
+11.7% -17.1% 5.7%
Hong Kong East
Kowloon East +3.8% -13.5% 19.5%
* Preliminary figures
Retail Market
The second half of 2009 saw a restoration of consumer confidence, triggered by a gradual economic recovery and the wealth effect brought about by stock market and property market rallies. At the same time, the inbound tourism market has also been improving with tourist arrival year-on-year growth on the rise for three consecutive months.  These factors have set a stronger platform for retail sales recovery in recent months.
As such, retail sales has achieved positive y-o-y growth since September after falling for seven consecutive months this year. However, this does not help hiding the fact that total retail sales value remains in the negative regime for the first 10 months of 2009, down gently by 2.2% y-o-y. Demand for big ticket items such as motor vehicles, jewellery, watches, etc. was particularly weak. 
In spite of the initial signs of retail market recovery, growth in rents was modest as many retailers remained cautiously optimistic without very aggressive expansion plans to date.  The more active trades during the year include jewelry and watch retailers and cosmetic chain stores. The year saw high street shop rents edging down 4%. As for premium prime shopping centres, there was no notable slowdown in leasing demand through 2009, with luxury brands continued to show sustained interest for spaces in the prime-most shopping centres.  Rents for premium prime shopping centres were largely stable throughout the year.  However, if we include shopping malls in non-core locations which tend to house more local retailers who are more vulnerable to economic shocks, then, rents for overall prime shopping centres edged down 3% during the year.
In line with the performance of other property sectors, the sales market for high street shops was active during 2009. In contrast with rentals, capital values for high street shops rose by 14.8% through the year. 
‘Over the past few months we have seen clearer signs that Hong Kong’s retail market is improving. Indeed we expect to see a more vigorous retail market in 2010. The gradual economic recovery will continue to help improve labour market conditions and further strengthen consumer confidence.  Arrivals of long haul visitors may remain low, but the refined policies of the Individual Visit Scheme will ensure a sustained growth in tourist arrivals for Hong Kong.  In 2010, we expect to see retail sales growth shift into the positive region which in turn will prompt retailers into expansion mode.  This will result in an uplift in leasing demand and possibly a 5-10% growth in retail rentals in the coming year,’ commented Jeannette Chan, Head of Retail, Hong Kong and Southern China.
Hong Kong Prime Retail Indicator - % Change
Capital Value
(2009 Full-Year) * 
Rental Value
(2009 Full-Year) *
Prime Street Shops 
Premium Prime Retail Centres 
N/A  +0.0%
Overall Prime Retail Centres
* Preliminary figures
Residential Market
The gradually improving economy, high liquidity and a low interest environment have led to a very robust residential sales market in 2009.  The number of residential sale and purchase agreements reached 105,984 units in the first 11 months of 2009, already surpassing that of 95,931 units registered for the whole year of 2008.  This year also saw an active primary sales market with over 14,000 units sold in the primary market in the first 10 months, which also exceeded the levels recorded in 2006 and 2008. 
The investment market for luxury properties was particularly active, with a total of 2,087 sales transactions for properties over HK$20 million being recorded in the first 10 months of 2009, with total consideration amounting to HK$79.5 billion. This is compared with the 1,552 transactions (HK$73.6 billion) registered for the full-year of 2008.
Capital values of residential properties experienced a strong run up in 2Q and 3Q, before slowing down in 4Q.  In the first 11 months of 2009, capital values of mass and luxury property markets increased 32.8% and 28.9%  respectively, bringing them back to their pre-crisis levels. 
In contrast with the sales market, the leasing market for top-tier luxury properties has been lagging as leasing demand from corporates remained weak. Coupled with lower housing budgets, luxury residential rents dropped by 5.6% through 2009.  However, the second half of the year saw a gradual pick-up in leasing activities, particularly for mid-tier apartment units. Indeed, luxury residential rents have turned around from the 9.6% drop recorded in 1H09 to a 4.4% increase in 2H09, indicating that rentals are now back onto a rising track.
‘Looking into 2010, although there are risks of an interest rate hike towards 2H10, ultimate holding costs will likely remain at low levels. The affordability ratio for mass properties is approaching an alarming level, which suggests that there is possible but limited room for further mass residential capital value growth.  As for the luxury market, extremely tight supply, the growing pool of Mainland Chinese high net-worth individuals, ample liquidity and the rising profile of Hong Kong’s luxury residential properties, will all combined to provide strong support to luxury residential capital values. The lagging rental performance thus far, also implies that it is possible for rentals to spin upward in the coming year.’ said Joseph Tsang, International Director and Head of Hong Kong Residential.
Hong Kong Prime Residential Indicator - % Change
Capital Value
(2009 Full-Year) *
Rental Value
(2009 Full-Year) *
* Preliminary figures
Warehouse Market
Hong Kong’s external trading environment remained challenging throughout 2009. As with the case in other property sectors, expansion and new letting demand for warehouse properties was relatively thin, that consolidation and lease renewal were the core themes in the warehouse leasing market in 2009.
In the first 10 months of 2009, total exports from and imports to Hong Kong dropped 15.8% year-on-year and 15.2% year-on-year, respectively.  Weaker local consumption and external trade markets also led to a reduced volume of cargos handled by airports and sea ports in Hong Kong, thereby affecting the demand for warehousing facilities.  Warehouse rents thus dropped 5.9% in 1H09, and by a further 1.6% in 2H09, making a total drop of 7.3% for the whole year of 2009.  The investment market was less affected as investors bank on long-term growth potential and stimulated by the high market liquidity and low cost of funding. After falling by 3.3% in 1H09, capital values of warehouses rebounded by 7% in 2H09, bringing the full-year growth to 3.5%.
Marcos Chan, Head of Research, Greater Pearl River Delta said, ‘Hong Kong’s external trading environment will remain challenging in 2010. However, signs of stabilisation in the global economy and sustained growth in China’s economy should give support to Hong Kong’s external trade performance in the coming months. The government’s initiative to facilitate the development of a logistics cluster in the Kwai Tsing area will benefit the mid-to-long term development of the city’s warehouse property sector. In general, we expect to see a relative increase in both warehouse investment and leasing demand in 2010. A pick-up in activities, coupled with the prevailing tight supply situation in the warehouse market, make us believe that both rents and capital values will rise modestly in 2010.’
Hong Kong Warehouse Indicator - % Change
Capital Value
(2009 Full-Year) * 
Rental Value
(2009 Full-Year) *

* Preliminary figures
Investment Market
The ultra low interest rate environment, high global liquidity, surging demand from Mainland Chinese high net-worth individuals as well as the perception of real estate as a relatively safe asset class following the global financial crisis, have boosted investment demand considerably in 2009.
After a quiet 1Q09, investment activities across all property sectors picked up strongly in 2Q and 3Q and recorded a significant growth in transaction volume in 2H09.  In the first 11 months of 2009, the total number and value of sales transactions involving land and properties worth HK$100 million and above amounted to 219 and HK$54.4 billion (compared with 194 transactions which worth HK$68.1 billion in 2008).
The market saw a growing interest from Mainland Chinese investors this year while foreign institutional investors were either as net sellers or holding a wait-and-see approach on the buy side. The divergence between capital values and rents has led to a significant yield compression across all property sectors through 2009, which made investment opportunities hardly justified in front of institutional investors.
‘The anticipated recovery in occupier demand and potential rental growth will draw the interest of investors in 2010. The outlook of the investment market is positive, but not without risk. While low interest rates, ample liquidity and limited new supply will continue to provide support for demand and capital value growth across all property sectors in Hong Kong, there are chances of seeing the global capital markets remaining volatile. It is also important to keep a close eye on the major governments’ plans for monetary easing exit strategies and their potential impact on the general economy,’ remarked Warren Liu, Head of Investments.
Mr Chan concluded, ‘So far in 2009, we have seen robust growth in capital values across all property sectors, with rents lagging far behind. Next year, we expect to see a modest increase in leasing activity across all property sectors. Any expansion plans, however, will only be mild in this initial stage of economic recovery. The sales market will continue to benefit from the low interest rate environment, high liquidity and limited new supply; but with a potential pick-up in rentals, the current cycle of yield compression will likely tail off. The market shall continue to see the growing importance of Mainland Chinese investors and occupiers. In general, we hold a cautiously optimistic view towards Hong Kong’s property market in 2010.’