Post-pandemic trends and response from Hong Kong real estate market

As Hong Kong returns to some semblance of normality after the lifting of the COVID-19 restrictions and reopening of its borders internationally and with Mainland China, a cautiously optimistic sentiment in the local real estate market emerges with the Government’s roll out of several initiatives to stimulate local, tourist spending and investment appetite.

As the city steps into Q4 of 2023, the market performance has begun to pick up its momentum and shows signs of improvement, although the progress differs across sectors in Hong Kong. Observing the recent market trends, the impact of interest rates and the macro and microeconomic environment, we are cautiously optimistic about Hong Kong’s real estate market in the coming 6-12 months and have confidence that the investment activities and appetite will bounce back quickly once the uncertainties and risk factors become clearer.

Retail Sector More Promising Than Offices

The retail sector has benefited most from the recovery of the pandemic. It is the only sector showing positive growth since the border reopened in Q2 of 2023, predominantly due to the return of mainland Chinese tourists to the city and are big spenders primarily in luxurious brands and products such as jewellery, watches and gold.

During the Golden Week in October, there was a substantial influx of mainland tourists which reached 85% of pre-Covid levels. Offset by an increase in outbound travel of local residents, retail sales have taken some time to recover but are gradually improving. The Government’s initiatives to roll out consumption vouchers after the border reopening and the launch of the nightlife campaign at the harbourfront are all welcoming measures to stimulate local spending. A reboot of the retail property leasing market is spotted with a reduced vacancy rate of retail spaces in high street locations and rent increase.

A few notable transactions include: 

1. The Macallan, a world-renowned whisky brand that opened its first global flagship store spanning across two floors (8,519 sq ft) in Queens’ Road Central for a monthly rent of HK$600,000; 
2. Chanel committing to an 18,000 sq ft space at Capitol Centre in Causeway Bay for a monthly rent of between HK$2.5 million and HK$4 million;
3. a 818 sq. ft ground floor retail unit at 45 Haiphong Road, Tsim Sha Tsui, being leased to a pharmacy for HK$300,000 per month; and 
4. a 75,000 sq. ft retail unit comprising of three floors in Silvercord, Tsim Sha Tsui being rented by a restaurant and entertainment group for HK$5 million a month.

An apparent acceleration of the leasing of retail spaces in the high street and core luxury mall locations, with committed leases mostly on the standard two-to-three-year terms, compared to the short-term leases that dominated the market during the pandemic, has helped improve the retail investment market sentiment.

Evolving Office Demand

The economic revival brought less significant growth in terms of occupancy rate and rental levels for offices. According to Jones Lang LaSalle’s monthly market report in September, the overall vacancy rate shows signs of stabilizing at a flattened rate of 12.8% at the end of August and is expected to sit at 12.6% by the end of this year,¹ although still at the highest level since 1990s.

The pandemic has significantly reshaped the office dynamic in Hong Kong. There is a notable trend in office downsizing and relocating to decentralized districts with consolidated spaces but an increasing overall demand for office upgrades. Co-working spaces and Grade-A premium office premises with green and technological facilities are becoming more popular. The new supply of around 3.2 million square feet of new Grade A office spaces this year will allow tenants to take advantage of the expected downward trend in rental and accelerate their relocation decisions. For example, a 86,800-squarefeet premise located in Airside in Kai Tak, Kowloon was leased to MUFG bank to consolidate its office located in Central and Quarry Bay, and Deloitte also took a lease of premises at The Millennity in Kwun Tong to reduce a part of their Admiralty office space.² In fact, the loosening of pandemic control measures followed by the border reopening since the first half of 2023 have also brought back a lot of inspection activities amongst local tenants and mainland companies.

The launch of the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance in 2023, which provides tax concession to family offices established in Hong Kong, will also bring a potential growth in demand for premium office spaces from wealth management and private banking businesses targeting the high net-worth individuals and families. All these present a positive impact of developing thriving office hubs in the new office-build areas and also add fuel to the revitalisation of old buildings to meet tenants’ evolving needs in the long run.

Conservative Approach in Industrial Investments

On the other hand, investment in industrial premises is heavily affected by the global economic climate despite the slight increase in export after China has reopened its border this year. Due to the growth of storage demands during the pandemic, the demand for industrial premises, particularly mini-storage, cold storage, data and logistics centres, remains resilient in capital and rental values and remains stable in Q2 of 2023 given the relatively quiet market activities.

 However, the overall investment appetite in industrial assets and leasing activities is gloomed by the weak logistic demand, decline in trade value and relatively high interest rates, making businesses more conservative in their expansion decisions and more cost cautious. Presently, industrial leasing transactions currently centre around renewals. A standout industrial performer could be the cold chain logistics sector. For example, KaiLong Group and Reitar Logtech Group started the construction of a large-scale automated cold chain project in May of this year, involving a conversion of an old industrial building in Kwai Chung into an automated cold chain logistics centre with a total GFA of over 200,000 sq ft, making it Hong Kong’s largest automated cold chain logistics centre.

Residential market currently driven by interest rate spike

Despite the large influx of mainlanders since the border reopened, the sentiment for residential purchases is greatly affected by the increase in interest rates and mortgage and financing/refinancing costs. This has discouraged transactions in both primary and secondary markets, with the lowest secondary transaction volume since January 2020 recorded in July 2023, according to Jones Lang LaSalle’s research. 

Still, such talents and young professionals may stimulate a new housing landscape with an increasing leasing demand in coliving, youth hostel and multifamily residences. As the city’s population continues to age, coupled with a scarcity of elderly homes, there is also a potential for developing and investing in more sophisticated residential facilities offering comprehensive medical care services and retirement community for the seniors.

Looking Forward

The future outlook of the Hong Kong office property market is hedged on Chinese firms driving the rebound as part and parcel of the city’s structural change as it becomes increasingly integrated with mainland China.³ Whilst all sectors are performing differently in the post-pandemic era, one thing can be certain is that the investment appetite of the assets in the short term will largely depend on the interest rate environment which, at present, poses a challenge in owning not only residential but all commercial and industrial premises as well.

In such an arrangement, all leases not published in the Gazette will be extended for 50 years without premium payment but subject to payment of annual Government rent. This legislative proposal is still under preliminary discussion stage, but this has put the investors at ease and removed the doubt as to extinguishing of the landowners’ interest upon expiry of the lease term.

Struggled through and battered by the halt of the market activities during the past three years, we have confidence and believe that Hong Kong will strive to regain its competitive edge with the continued support of the policy from China on the Greater Bay Area in which Hong Kong forms a part thereof. The influx of incoming tourists, business operators, talents and professionals from mainland China and abroad definitely represents a silver lining for Hong Kong to recover and stabilise its growth in the property market gradually. Experiences from the pandemic have made the city more flexible and innovative in making adjustments to our practices and measures to cater for the dynamic change in Hong Kong’s property market.

We constantly monitor the market situation in Hong Kong. Our Real Estate team in Hong Kong is led by our senior Real Estate partner, Polly Chu, who has over 25 years of experience in the Real Estate market. Her team also works closely with Withers’ International Real Estate Team in Singapore, Tokyo, Europe and US offices to assist our clients with complex and cross-border transactions.

This article is first published in The International Real Estate Finance & Investment Review 2023/2024.