At the midway point of 2016, Hong Kong’s various property sectors are all over the map.

The sky is falling in on Hong Kong’s property market. Depending on whom you speak to, the retail sector is suffering worse than it has in decades. Or it’s a premium retail destination. Prime office occupancy is high. Or non-core locations are eking away at Central’s pre-eminence. Whatever the case, the rest of 2016 is going to be eventful.

Commercial Conflict
Both the office and retail sectors are crucial to Hong Kong’s overall economic health and, as of June, the office sector was proving resilient according to Savills.

Institutional activity (by local and Mainland owner-occupiers and cash rich investors) is robust, and supply on Hong Kong Island is, unsurprisingly, restricted. The long predicted trend of blue-chip relocations to more cost-effective, non-core districts finally blossomed when an international law firm moved to Quarry Bay and high profile co-working space provider WeWork took space in Causeway Bay.

Regardless of low vacancy rates across districts, tenants are taking advantage of more opportunity.
“In the next three months alone, about 860,000 square feet (0.9% of total stock) of floor space is set to be vacated upon lease expiry with Kowloon East to provide the most opportunities,” says JLL research head Denis Ma.
“This significant amount of marketable space has been one of the reasons why rental growth has been so anaemic despite vacancy rates being at such low levels.”

Core office rents are expected to rise 2% to 3% for 2016 and fall the same amount in non-core districts, while prices should rise a further 3% and fall 2%.

Where the office sector is fluid, but relatively stable, retail is another beast.

A second half retail forecast from Knight Frank predicts sales volumes and visitor arrivals will both fall as much as 5%, and high street shop rents will drop between 5% and 10%.

Only prime shopping mall rents are set for positive growth: up to 2%.

That said, seven retail properties sold to international investors, signalling faith in Hong Kong’s retail market, and Versace pre-leased 13,000 square feet for a new Central flagship.

Seemingly in support of that, May research by JLL ranked Hong Kong as the second most appealing luxury retail destination in the world (after London).

“Hong Kong remains Asia’s leading luxury shopping destination,” says JLL’s James Assersohn, director of retail for Asia Pacific.

Arguing it is still a springboard into China for many, “Hong Kong continues to attract many high-spending Mainland tourists”, despite a slowing economy and an ongoing anti-corruption campaign.

In addition, Terence Chan, head of retail at JLL, pointed out that international brands targeting mass and mid-market consumers are active in the SAR.

“The recent rental correction gave them a good opportunity in Hong Kong’s retail market.”
Chan expects street rents will drop 10% to 15% in 2016.

But Marcos Chan, head of research at CBRE, is wary, citing shop closures impacting unemployment figures, and the hospitality sector being negatively influenced by falling tourist numbers, which are off 11% in the first quarter over the previous year.

Things could get worse before they get better. A weak economic outlook could trickle down to finance and trading, leading to lower operating costs.

“Should this job instability spill over to other industries, local consumer confidence would be further dampened. Spending will be diverted to necessities and housing costs, which in turn worsens the retail market,” Chan says.

Those same fears of an economic slump have led to weakened sentiment, felt strongest in residential property.

For most of us, the residential sector is where the action (or lack of it) is. With no changes in policy from the Monetary Authority on cooling measures one way or the other, things have been fairly static in purchasing.

But that doesn’t mean there’s no news. With an interest rate hike in the US finally materialising in December and another incremental rise not expected soon, the ongoing cooling measures and a flood of new supply expected between now and 2020 (an estimated 108,000 units) with potential for 38,000 units in Kai Tak this year alone, potential buyers are biding their time.

What little activity is unfolding has largely been in the New Territories primary market, where the majority of that new supply is headed (53% to 2020).

“The secondary market is very quiet and transaction volumes are pretty low. I expect the secondary market in the New Territories is under much more pressure too,” says Knight Frank’s senior director and head of valuation and consultancy, Thomas Lam.

“Prices are dropping on the island too, but at a lower rate than in the New Territories. All the new supply is up there. If you’re a new homebuyer, you’re looking out there.”

Indeed, in a market where Knight Frank predicts prices and rent both to fall a further 3% to 5% this year, secondary sales are expected to fall too, as developers remain aggressive.

As Lam notes, those who are buying are showing a preference for new launches.

“Of course, if the pricing is similar. If you look at new launches many have attractive packages and attractive pricing. They are averaging around $10,000 per square foot. And some developers are offering financing at 90% or 95%.”

North of the border, things are very different. China is facing an inventory glut that could take upwards of two years to clear in some locations. The PRC is currently sitting on 4.9 billion square feet of residential stock, just 7.5% of it in first-tier cities.

As a result, cities such as Dandong (prices down year-on-year by 3.8%), Xining (down 2.5%), Jining and Urumqi (both down 2.1%) are faring far worse than their first-tier counterparts.

Since the first quarter of 2015, Shenzhen has been the star, seeing prices soar 62%, with Beijing rising 18%, Shanghai 30%, Hangzhou 11.9% and Wuhan 7.7%.

Through it all, Knight Frank predicts price gains of 10% to 18% in first-tier and 6% to 8% in second-tier cities for 2016 on fewer housing starts and interest rate cuts.