Less severe corrections in commercial property market in 2021
Retail will be the first market to bottom out and rebound
HONG KONG, 10 December 2020 – The COVID-19 outbreak had led to a price correction across the commercial real estate leasing and investment markets in 2020. Although the volatile pandemic situation and geopolitical tensions will continue to cloud the path to recovery in the property market, the price corrections will be less severe next year. Retail properties, which recorded the sharpest fall this year, are expected to bottom out and will be the only sector to record growth in 2021, according to JLL’s Year-end Property Market Review and Forecasts published today.
Highlights of the report:
- Central’s Grade A office rent fell to the lowest level since 2015.
- Overall Grade A office recorded the highest withdrawal ever recorded.
- Overall Grade A office rents will drop 5-10% in 2021.
- Rents of High Street Shops have returned to the market level at fourth quarter of 2003.
- Rents of High Streets Shops and Prime Shopping Centres will rebound 0-5% in 2021.
- Combined with the impact from the pandemic, the narrowing price gap between Hong Kong and China on luxury goods is likely to accelerate the structural change of tourist spending profile.
- Capital values of mass residential dropped 1% in 2020, but prices of luxury residential dropped 8.2%.
- JLL urges the government to smooth out the progressive ladder of LTV ratio of properties of over HKD 10 million to allow easier upgrading, hence releasing more units in the secondary market.
- Total investment volumes for commercial properties worth over HKD 20 million have dropped to the lowest level since the Global Financial Crisis.
- Capital values of High Street Shops will rebound 5-10% in 2021. But capital values of Grade A office and Flatted Factories will drop further by 10-15% and 5-10% respectively.
2020 is a challenging year for Hong Kong’s office leasing market, which has been hit by the economic recession, geopolitical tensions and the pandemic. Leasing demand remained subdued with the net absorption reaching -2.5 million sq ft this year, among the highest withdrawal in the office market ever recorded. New lettings in Central dropped about 39% as compared to 2019.
The vacancy rate in the overall office market rose to 8.8%, the highest level since 2004. Surrender space in the overall market also reached 1.6 million sq ft, a record high since 2001.
Rental decline in traditional business districts was more significant than decentralised locations as more tenants are seeking cost-effective options. Central’s rents dropped 22.7% YTD to HKD 93.8 per sq ft, NFA, the sharpest among the office submarkets. It has dropped 28.0% from the peak at the second quarter of 2019 and fell to the lowest level since 2015.
Alex Barnes, Head of Markets at JLL in Hong Kong, said: “Despite subdued leasing demand in the near term, gross leasing volume is expected to pick up in 2021 as tenants start making longer term real estate decisions. The vacancy rates will continue to rise in 2021, albeit at a slower pace. The rental fall would be less significant next year compared with 2020. We expect office rents to drop 5-10% in 2021 across all major office submarkets, except for Tsimshatsui, which will fall by 10-15% due to its older office stock and competition from decentralised locations.”
“Lower rents can increase the city’s competitiveness, potentially positioning Hong Kong as a more attractive location to conduct business. The secondary listings of PRC firms in Hong Kong and GBA Wealth Management Connect would attract more mainland financial institutions and related industries to set up offices in the city, which could help support office demand in the medium term,” he added.
Hong Kong Prime Office Indicator – % Change
|Submarket||2020 Rental Values*||2021 Rental Forecast|
|Hong Kong East||▼11.0%||▼5-10%|