In a troubling forecast for Hong Kong's commercial real estate sector, Cushman & Wakefield reports that Grade A office rents in the city have already seen a significant decline of 5.9 percent as of mid-November 2023. Looking ahead, analysts predict a further drop of up to 9 percent in 2025, intensifying concerns over the long-term vitality of the office space market.

Despite the downturn in rental prices, there are signs of optimism. In the last quarter leading to mid-November, tenants across Hong Kong occupied 46,000 square feet of additional Grade A office space, marking the fifth consecutive quarter of positive net absorption. Year-to-date net absorption has surpassed 1 million square feet, the highest level recorded since 2019. This surge highlights a potential recovery in demand, particularly if the local economy rebounds and the IPO markets perform well, according to John Siu, managing director for Hong Kong at Cushman & Wakefield.

However, the looming specter of increased office supply—projected at 3.5 million square feet for next year—will likely keep rents in check. Siu warns that the availability rate could exceed 20 percent in 2025, contributing to continued price declines.

Sector Insights

The banking and finance industries have been the key drivers of new lettings, comprising 33 percent of newly leased areas. Separately, demand from the education sector has surged, accounting for 12 percent of the total leased area. Noteworthy commitments have been made by prestigious institutions like the Hong Kong University of Science and Technology and the University of Hong Kong, both securing over 10,000 square feet in prominent locations such as the Manulife Financial Centre.

In a contrasting trend, the retail sector is blossoming. High street vacancy rates in prime areas have fallen to 7.6 percent, driven by a strong resurgence in leasing activity from both local and mainland Chinese brands. Notably, Causeway Bay achieved a remarkable 0 percent vacancy rate for the first time since 2019, reflecting an eagerness among retailers to re-enter key tourist districts as rents stabilize.

While high street retail rents have shown an increase of 3 percent to 7 percent thus far in 2023, brands remain conservative in their growth strategies amidst shifting consumer spending habits. Siu observes, "Leasing demand will mainly be influenced by mainland Chinese brands seeing Hong Kong as a launchpad for their international ambitions."

Residential Market Dynamics

In the residential market, Cushman & Wakefield anticipates a total transaction volume of 53,800 for 2024, spurred by recent interest rate cuts and relaxed loan-to-value rules. Prospective buyers might find encouragement in a predicted rise in transactions by 5 percent to 8 percent in 2025, with prices expected to rebound by 5 percent.

Investment trends are also shifting, with major non-residential transactions totaling HK$28.5 billion ($3.7 billion) so far this year. The student housing segment is likely to draw considerable interest from investors, as demand grows alongside an influx of expatriate talent and non-local students.

Tom Ko, executive director and head of capital markets for Hong Kong, states, "The Hong Kong Policy Address advocating for the conversion of hotels and commercial properties into student housing is expected to keep this sector highly sought-after, especially in prime locations."

As the market navigates these turbulent waters, stakeholders will need to stay vigilant and adapt to the rapidly evolving dynamics in both the office and residential real estate landscapes. Stay tuned as these trends unfold, and discover what the future holds for Hong Kong's property market!