Property market to slowly recover in 2021

Vacancy rates will continue to rise in 2021 at a slower pace

The gradual improvement is amidst major vaccine developments and easing of restrictions

In 2020, Hong Kong’s property market has been heavily affected as many businesses downsized their manpower, reduced costs, and implemented “work from home” arrangements amidst the COVID-19 pandemic.

According to Savills, local unemployment rose by over 130,000 people as petitions presented for bankruptcy and winding-up increased by more than 550 during the year, even with support from the government.

With this, multinational corporations (MNCs) have begun to cut down on their operations whilst working from home arrangements have been adopted mostly by overseas corporates. However, with developments of major vaccines making headlines and restrictions gradually easing, improvements might be visible in the property market scene within 2021.

Office rents’ lowest drop

Savills’ data has seen overall Grade A rents crashing by 16.6% over 2020

Despite subdued leasing demand in the near term, gross leasing volume is expected to pick up in 2021

as a whole, marking the largest yearly decline since 2009.

The Wanchai/Causeway Bay submarket posted the largest decrease over the year with a 22% fall, followed by Central (-18.9%) and Island East (-15.3%).

Moreover, overall Grade A office vacancy rose from 4.7% at the end of 2019 to 8.4% in the last month of 2020. “Vacancy rates remain stubbornly high and are expected to rise into this year as corporate woes persist,” according to Savills senior director for research Simon Smith.

Meanwhile, JLL Hong Kong data shows leasing demand remains subdued with the net absorption reaching -2.5 million sqft. this year, amongst the highest withdrawal in the office market ever recorded.

Head of markets Alex Barnes mentioned that 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 this year.

“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,” Barnes said.

Both Savills and JLL expect overall office rents to still fall by 5% to 10% in 2021.

“Vaccine and travel dependent, we could see a period of rental stability over the second half before supply challenges in 2022 again put landlords on the back foot,” the Savills report stated.

“Lower rents can increase the city’s competitiveness, potentially positioning Hong Kong as a more attractive location to conduct business,” Barnes added.

Pressure on residential market prices to ease

Global quantitative easing to the COVID-19 pandemic has relieved the pressure on residential prices caused by a soft economy.

JLL notes that combined with the support of strong pent-up demand and the low level of new housing supply, capital values of mass

residential dropped only 1% in 2020. However, capital values of luxury residential dropped 8.2% due to the weak investment sentiment.

“The low interest rate will continue to support housing demand next year. But the market activity will remain closely tied to the broader economy and unemployment trend,” JLL chairman Joseph Tsang said.

“Although market activity is expected to pick up mildly if the Hong Kong-China border reopens, transaction volume will remain much lower than historic levels in times of high economic uncertainties,” he added.

Tsang expects the capital values of mass residential to drop by up to 5%, whilst capital values of luxury residential will drop from 5% to 10% in 2021.

JLL’s report also stated that developers are more cautious about luxury residential development in view of poor investment sentiment.

Meanwhile, Savills noted that as corporates have cut salaries and housing allowances, tenants have had every incentive to negotiate rental terms and landlords have generally been willing to accept cuts rather than face the risk of prolonged vacancy of their properties.

Luxury apartment rents fell by 11.5% YoY, whilst serviced apartment rents decreased by 12.5% over 2020.

Townhouse rents also dipped by 3.1% YoY in Q4 of 2020, with the sector experiencing rental declines for seven consecutive quarters.

Discovery Bay was Hong Kong’s worst hit rental market, with apartment rents down by 15.4% YoY over 2020 amidst woes of the airline industry in the region.

Savills noted that the overall market was “fairly flat” in Q4 2020, in terms of both rents and volumes, and is most likely to remain so until borders reopen.

Their report stated that all districts on Hong Kong Island recorded larger rental decreases in Q4 compared with the previous quarter, with Southside/Shouson Hill registering the largest rental decline by 4.2%, followed by The Peak with a 3.8% fall and Happy Valley/Jardine’s Lookout which slid 3.5%.

Savills added that with no new arrivals, operators are offering rental reductions of 10% to 20% on longer leases and free upgrades to larger units. Most turnover in the sector is from the existing tenant base.

“The market remains locked up with few new arrivals and a trickle of leavers, a situation likely to persist into the first quarter of this year,” Smith said.

Both luxury residential rents and townhouse rents are expected to continue to slip in the first half of 2021, whilst rents could stabilise over the second half, depending on the situation of the COVID-19 vaccine and travel.

Retail rents expected to bottom out before rebounding

According to Savills, retail rents are likely to bottom out in the first half of 2021. Retail sales were down by 27% year over year from January to October 2020.

It forecasts that rents will continue to drop by 2% to 5% in 2021 before a rebound of 5% to 10% in 2022.

Meanwhile, food and beverage (F&B) continues to take up space as landlords are keen to sign up crowd-pulling concepts, often local, to support footfall in major malls. Activity levels, meanwhile, are very low beyond F&B and the market remains frozen with only a handful of deals done in Q4.

There has also been a noticeable rise in the number of short-term tenancies, which usually include sellers of masks, red packets, groceries and frozen meats, as key shopping districts and most malls are facing sharply higher vacancies.

Landlords are already opening their doors to local restaurants, but some of their attempts to break down larger shops into smaller units are met with little interest.

Shopping centre landlords are now reconciled to market conditions and becoming more flexible in both asking rents and lease terms.

Moreover, both prime street shop rents as well as base rents of major shopping centres dropped by 5.9% QoQ in Q4 2020 amidst a “sluggish leasing market”.

“While rents may continue to slip over the first half of this year, we can see some activity returning after the Chinese New Year with a market turnaround most likely in 2022,” added Smith.

JLL also noted that the city’s inbound tourism continued to completely stall as visitor arrivals dropped by 92.2% YoY in the first 10 months of 2020. Rents of High Street Shops plunged 36.8% so far, whilst rents of Prime Shopping Centres slumped 31.6%.

F&B operators and mass-market retailers targeting the local market are still keen on expansion, given agreeable rental levels.

However, tourist-driven retailers plans to continue consolidating their stores in core shopping districts for cost-saving.

Head of retail Oliver Tong described the permanent effects of COVID-19 in the shopping experience of people.

“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,” he said.

The retail market will heavily rely on local consumption in the short run,” Tong added.

The report also states that High Street Shops and Prime Shopping Centres are expected to rebound by up to 5% in 2021. This is on the back of a modest economic recovery and potentially some travel bubbles to be effected in Hong Kong.

Simon Smith

Oliver Tong

Joseph Tsan

Alex Barnes

Grade A Office Vacancy Rates by District

Source: : Savills Research & Consultancy