Colliers International, Hong Kong

Negative sentiment prevails due to financial market turbulence

Colliers International has recently released the Knowledge Report – October 2008 on Hong Kong Property Market Overview, reviewing the lingering financial market turbulence’s influence on local property market and forecasting the market trend.

In Hong Kong, local gross domestic product expanded moderately by 4.2% quarter-on-quarter (QoQ) in 2Q 2008 after the stronger-than-expected growth of 7.3% registered in 1Q 2008.  Although the Government announced to introduce a number of short-term relief measures in July 2008 to alleviate inflationary pressure, the sentiment of the local property market was recently dampened by the discouraging performance of the local stock market prices.  In addition, the recent collapse of Lehman Brothers in September 2008 was another bearish sign showing that the local real estate market might experience further rental and price correction over the near- to medium-term as a result of the anticipated consolidation of the whole finance industry.   

Office Sector
In 3Q 2008, the office market sentiment turned dramatically bearish.  With the fall out of Lehman Brothers, the market anticipated to see material rental decline over the near- to medium-term as a result of the anticipated consolidation of the whole finance industry. 

Meanwhile, a number of companies found the prevailing rental level in Central has surpassed their affordable limits, and chose to leave Central for decentralized districts.  Although the average effective office rental in Central still saw a marginal growth of 0.7% QoQ in 3Q 2008, it declined by 0.4% month-on-month (MoM) in August 2008.  The negative monthly growth was the first time during current office rental upswing which started in late 2003.  In terms of vacancy rate, the increase of new supply in Kowloon East, including Manhattan Place and Landmark East, and the fact that the new space is yet to be fully occupied, drove the overall average Grade A office vacancy rate up from 3.2% in 2Q 2008 to 4.3% in 3Q 2008. 

Looking forward, the current office cycle in Hong Kong is predicted to stage a consolidation after a five-year rally.  If the external environment deteriorates further, Grade A office rentals are anticipated to decline by 15-20% over the next 12 months.

Luxury Residential Sector
The discouraging performance of global financial markets and the uncertainty on the global economic growth clouded the residential market in 3Q 2008.  Lately, the market saw a general rise in property financing costs.  For example, local banks reduced loan-to-value ratio and are conservative in valuation for mortgage financing, while HSBC took the lead to raise rates for newly approved residential mortgage loans.  During the three-month period ended August 2008, the number of luxury residential sale transactions dropped significantly by 25% QoQ.  Despite the slowing sales volume, the average luxury residential prices stayed largely flat during 3Q 2008 and registered HK$14,800 per sq ft as at the end of August 2008.  On the leasing front, the average luxury residential rental edged up further by 2.2% QoQ to HK$46.24 per sq ft per month.  However, in anticipation of prospective economic slowdown and the consolidation of the finance industry, most companies have increased cost consciousness.  In addition, occupation demand is expected to soften as new headcounts were frozen in some companies and high volume of hiring was reduced.

Looking forward, the luxury residential rental and price is expected to drop by 15% and 15-20% respectively over the next 12 months.

Industrial Sector
Given the tightening credit conditions and global economic slowdown, external trade in Hong Kong was dampened in 3Q 2008, with the overall growth tapering off to 5.2% year-on-year (YoY) during the three-month period ended August 2008 compared with 11.6% YoY in the previous quarter.  Quality warehouses with ramp access continued to be the best performing sub-sector, with average rentals increasing 1.5% QoQ to HK$9.50 per sq ft per month.  On the investment front, the trend of rising financing costs due to the continued credit squeeze has been one of the key reasons holding back a significant portion of investment activity in the industrial property market during 3Q 2008.  The total number of sale transactions in industrial market declined 15.1% QoQ in the quarter ended August 2008.  Particularly, the volume in August 2008 saw a total of less than 300 sale deals, representing the slowest month since  1Q 2004.  In spite of the financial turmoil, there were no signs that existing tenants will downsize their scale of operations as at 3Q 2008. 

The consolidation of the financial sector and the potential global economic slowdown will be the challenges for the prospective growth of re-exports and the logistics throughput in Hong Kong.  In the next 12 months, logistics warehousing is anticipated to see a downward rental adjustment of 5-7%. 

Retail Sector
Although the overall consumption sentiment was affected by the continued fall of stock market prices and inflationary pressure, the sustained influx of visitors, growing 5% QoQ to 7.5 million between June and August 2008, continued to support the retail market.  Against the backdrop of the continued increase in retail sales and growing expenditure by inbound visitors, particularly those from Mainland China, the financial turbulence did not result into significant demand contraction.  The occupancy demand, particularly the top-end international labels’, remained positive but staying cautious about making any new commitment.  Meanwhile, vendors have generally softened their asking rentals, which retailers taking a long-term perspective of Hong Kong have viewed this as an opportunity to enter the market, particularly for prime retail units in traditional shopping locations. 

During 3Q 2008, the average retail rental in the four traditional shopping districts, including Mong Kok, Tsim Sha Tsui, Causeway Bay and Central, fell 3.6% QoQ in August 2008.  Over the next 12 months, the retail rentals and prices are predicted to come down 5-10% and 10% respectively in anticipation of slowing retail sales growth and the easing of local inflationary pressure.

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About Colliers International

Colliers Macaulay Nicolls Inc. (CMN) operating as Colliers International is a leading global real estate services company that provides a full range of services to real estate users, owners and investors worldwide. Colliers operates in 293 offices in 61 countries.  In Asia Pacific, Colliers has 62 offices in 15 countries.  Services include brokerage, property management, hotel investment sales and consulting, corporate services, valuation, consulting and appraisal services, mortgage banking and research.  Colliers International is a worldwide affiliation of independently owned and operated companies.  Locally, Colliers professionals serve clients in Hong Kong.

Contact Information

May Chow        
Regional Manager
Communications and PR, Hong Kong Marketing
Colliers International (Hong Kong) Ltd
Tel    852 2822 0736
Fax   852 2868 5275
Email: May.Chow@colliers.com

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