Cushman & Wakefield Hong Kong and Asia Pacific Property Market Forecast

Hong Kong, January 30th, 2012: Cushman & Wakefield, the world’s largest privately owned real estate services firm, today announced its forecast for the Hong Kong and Asia Pacific property markets, which covers the commercial leasing, investment and residential markets.

Decline in leasing of Grade A office space expected, rents to drop by 5% to 15%

Overall Q4 office rents adjusted downward by 4.0% quarter-on-quarter to HK$69.60 per sq. ft. per month while the office availability rate dropped from 3.9% to 3.6% as compared with the previous quarter. Average monthly rent in Greater Central (including Sheung Wan, Central and Admiralty) fell to HK$118.30, a quarterly decline of 5.9%, the greatest drop among all districts. John Siu, Executive Director of Cushman & Wakefield (Hong Kong), said, “occupants of Greater Central office buildings have cut or even halted their expansion of office space amid unfavourable factors, such as the European sovereign debt crisis, global economic uncertainties and lacklustre performance of the local stock market. Landlords are not optimistic about the economy in 2012 and have lowered asking prices in addition to offering more flexible lease terms and conditions in order to entice renewals and attract new tenants”.

Jonathan Sullivan, Research Manager of Cushman & Wakefield (Hong Kong) said, “418 new leases of Grade A office space comprising a total floor area of 3.63 million sq. ft. were recorded in the territory in 2011. 229 of these leases were executed in the first half of 2011 with 189 having been transacted in the second half of the year, a retreat of 17.5%.” Hong Kong Island saw a drop in new lease cases of over 27.7%. Nevertheless, some districts reported increases, as was the case in Tsim Sha Tsui where new leases increased by 38.1% in the second half of 2011. Gary Fok, Director, Commercial Transaction Services of Cushman & Wakefield (Hong Kong), said, “given the high rent in Greater Central and a bleak economy, cases of expansion in and relocation to the district dropped in the second half of 2011. Moreover, availability rates of other districts in Hong Kong Island, such as Wan Chai / Causeway Bay and Island East, have declined to 2.4%, resulting in fewer transactions on Hong Kong Island and more in Tsim Sha Tsui, where rents have fallen behind other areas”. Looking forward, Mr. Fok estimates that availability rates will range from 3% to 4% across all districts. Due to a lack of new projects with affordable rents to stimulate relocation activities, it is expected that the market will see fewer new lease cases and less leased floor space, which will amount to 50% to 60% of the amount in 2011. Average rents will fall by 5% to 10%, subject to location. Rents in Greater Central are expected to experience a decrease of 15%. If the global economy further deteriorates, rents are likely to fall by an additional 5% to 10%.

International brands flock to Hong Kong, resilient demand for prime street locations

According to data provided by the Hong Kong Tourism Board, Hong Kong visitor arrivals reached 41.92 million last year, whereas Chinese mainland visitors accounted for 28.10 million arrivals. Gross retail sales amounted to HK$400 billion, indicating a very strong market. Michelle Woo, Senior Director, Retail Transaction Services of Cushman & Wakefield, said, “the local economic foundation remains solid and Mainland visitors are flocking to Hong Kong for luxury goods, and therefore it is anticipated that the retail market will continue to expand in 2012, while brands impacted by the European sovereign debt crisis will also establish a footprint in Hong Kong. Renowned international retailers will be in fierce competition for favourable locations in key retail areas. Landlords will soon begin to negotiate with tenants on leases expiring in the second half of 2012 and stand to benefit from the large increase in rents since 2009. As compared to 2011, prime street locations and other slightly less prime locations will see rents rise by 25% to 35% and 15% to 20%, respectively. Recent notable large-scale transactions include the leasing of the ground and first floors in Asia Standard Tower by LAB, owned by Lane Crawford. The monthly rent amounts to HK$3.5 million and the previous tenant was Chinese Arts & Crafts.” 

F&B outlets active thanks to Chinese mainland visitors

F&B operators remain active in the market and continue to fight for prime locations on main streets. Dennis Lau, Director, Retail Transaction Services of Cushman & Wakefield, said, “rents in the fourth quarter of 2011 have risen slightly and set a record high. Rents in Causeway Bay and Tsim Sha Tsui have risen by around 10% year-on-year. Some tenants had no alternatives but to pay higher rents to stay in the same location, or have moved to non-prime retail districts or higher floors to continue their business. Furthermore, the rapid increase in wages and price of food ingredients further boosted the operation costs of F&B outlets. Mr. Lau expects that due to the expectation of a slight slowdown in global economic growth in 2012, consumers will become more cautious in their spending. Large-scale layoffs will also affect citizens’ willingness to consume and dine out. However, Chinese mainland visitor spending will continue to grow. This can offset the impacts of rises in rent, wages and food ingredients on F&B operators. Rents in key retail areas will see growth of 10% to 15% in 2012.

High value transactions fell in 2011 with an exacerbated drop in second half of 2011

According to Cushman & Wakefield Research, in 2011, 254 transactions of over HK$100 million were recorded with a total value of HK$80.7 billion. In 2010, there were 314 transactions of over HK$100 million with a total value of HK$92.5 billion. The total transaction value fell by only 12.8% but the number of transactions fell by 19.1%. Kent Fong, Senior Director, Investment, Capital Markets, Cushman & Wakefield Hong Kong, said, “Singapore's sovereign fund owners Mapletree purchased Festival Walk for HK$18.8 billion, breaking Hong Kong’s record. Investment sentiment was much worse in the second half of 2011, and the number of transactions has continued to fall. In the second half of 2011, there were only 83 transactions involving more than HK$100 million, a decline of 51% from the 171 recorded in the first half of 2011. The major factors are the worsening economy which deters investors, along with the increase of mortgage rates from less than 1% to 3%. Ricky Wong, Senior Director, Investment Services of Cushman & Wakefield, said, “despite the poor market sentiment, foreign funds and REITs are still active as they have a considerable amount of cash for properties with high returns and investment potential. For instance, the hotels and shopping malls bought by Singaporean funds and the Link REIT respectively bring a return in rent of more than 4%.”

Looking forward, the deteriorating EU crisis and slowing Chinese economic growth will cause most investors to remain cautious and as such, low transaction volume is expected. With a limited number of transactions and poor market sentiment, some properties prices may go downward.

Small to medium-sized flat prices to fall by up to 15% in 2012

Vincent Cheung, National Director, Valuation & Advisory, Cushman & Wakefield, said, “in Q1 and Q2 2012, momentum in the residential property market will carry over from 2011. The market will await the latest housing policies and observe the market changes in the second half of 2012, when the new Chief Executive takes over the HKSAR government and the EU sovereign debt situation becomes clearer. In Q4 2011, only 13,739 transactions were recorded, a fall of 57% year-on-year. According to data from the local Rating and Valuation Department, private residential property prices witnessed a decline of 2.1% quarter-on-quarter in Q4 2011. More landlords have turned to leasing their flats instead of placing them up for sale. Despite more properties available for lease, rents in Q4 2011 still increased by 8.3% year-on-year and were relatively stable quarter-on-quarter. In the near term, more properties to let will create slight pressure on rents. However, in the longer term, with fewer sales transactions, supply of flats for lease will not increase significantly, allowing rents to remain stable. Provided that rents remain relatively stable over the next 12 months, residential yields could rise by 20 to 50 basis points.

The government will introduce 21 government land plots for tender or auction, which can provide about 6,800 flats. Considering about 6,600 homes offered by the MTR Nam Cheong and Tsuen Wan West Stations, the total number of new flats will reach 13,400. Besides, according to the Development Bureau, an average of 3,300 flats is created by amending land leases or new projects. The three land plots for residential projects, the tender of which closes in Q1 2012, can also provide 1,700 new flats. Currently, 18,400 flats have been provided to the market.

Supply will continue to grow gradually and the government has no intention of suppressing the private residential property market. The global economy is unlikely to recover in the short term and the property market will face greater pressure in 2012. Small to medium-sized flat prices are anticipated to adjust by 10% to 15% throughout the year. Nevertheless, luxury properties costing over HK$30 million will suffer less and see an adjustment of 5% to 10% during the same period.

APAC region to see GDP growth of 5% in 2012, strong investment target   

Sigrid Zialcita, Managing Director, Research Services of Cushman & Wakefield, said, “regional economic growth has slowed but a recession is unlikely to take place.” Ms. Zialcita expects that GDP will increase by 4% to 5% in the region, whereas GDP growth in the US, Europe, Middle East and Africa will fall to 1% to 2%. Nonetheless, the Asia Pacific economy is not immune to the weak sentiment in the US and Europe. Favourable factors in Asia Pacific, including sufficient demand for general goods and services, can contribute to the activities in the region and offset negative impacts of the EU sovereign debt crisis and bailout programmes by governments. Investment is likely to go upward across most of the region, and property markets are sound with sufficient capital. Therefore, Asia Pacific is still in a strong position to attract property investment. Overall, Asia Pacific property market will remain active amidst the challenging global economic situation.