Economic and market recovery to gather pace in the second half of the year

HONG KONG, 26 January 2021 -- Leading diversified professional services and investment management firm Colliers International Hong Kong SAR (NASDAQ and TSX: CIGI) today released its Market Outlook for 2021. Taking a macro view of the economy and its impact on the overall real estate market, the leading research looks at recent performance and an in-depth analysis of Hong Kong’s core sectors: investment, office, retail and industrial.

Key market indicators to boost real estate demand

Despite Covid-19’s continued pressure on Hong Kong’s economy, it is anticipated that there will be a gradual recovery in real estate demand and see the market stabilise in the second half of 2021, supported by the roll-out of a vaccine and China’s on-going economic recovery. Several key indicators including an extended low interest rate environment; a strong money supply (M1, M2 and M3); and the potential weakening USD against the RMB as a result of the US’s large financial stimulus package under the Biden administration, are providing some buffers to Hong Kong’s real estate market.

Rosanna Tang, Head of Research | Hong Kong & Greater Bay Area, said: “Hong Kong’s GDP growth is expected to rebound to positive in 2021 leveraging China’s economic recovery as well as starting from the low base recorded in 2020. The market is regaining more clarity on some previous concerns, including the US presidential election result as well as the potential solution for the Covid-19 pandemic with vaccine development.

“Whilst the property market in Hong Kong has been undergoing a correction across most commercial sectors, the performance of the industrial sector remained relatively resilient, with overall rents and prices witnessing modest declines by single-digit. With the COVID-19 induced work from home trend and the rise of 5G connectivity, corporates and investors are increasingly seeing data centres as an important asset class, while the rise of local consumption and food logistics performance will also boost cold storage demand,” added Tang.

Low transaction levels in 2020 fuel pent-up demand for 2021

Hong Kong’s investment transactional volume dropped by -47% YOY to $60.1 billion in 2020, the lowest record in the last decade. Overall activity remained muted in 2020 but saw a pick-up in investment volume towards the end of the final quarter with standout transactions including Cityplaza One (HK$9.85 billion), indicating at a potential turn in investment sentiment.

Stanley Wong, Senior Executive Director, Capital Markets & Investment Services | Hong Kong added: “As we move into 2021, it’s clear that investor sentiment has improved as we’re seeing private equity funds seek deployment opportunities. It’s important to note that Hong Kong’s capital supply (M1, M2 and M3) is at an all-time high; when combined with interest rates that are close to the sub-zero range and the removal of the Double Stamp Duty on commercial assets, 2021 has the right environment to deliver a strong recovery in transaction volume.

“It is also very likely that we will see more Mainland capital invested into the Hong Kong market in 2021. The continued recovery of China’s economy and the strengthening of the RMB against a potentially weakening USD will make the Hong Kong real estate pricing attractive to Chinese investors. It’s also important to note the China’s Central Government is putting momentum behind the Greater Bay Area (GBA) with Hong Kong being the financial hub in the development map. This will act as a beacon to major corporates to mobilise capital into HK,” concluded Wong.

Land revenue to fall short of annual target

CK Lau, Managing Director, Valuations and Advisory Services | Asia, said: “The land sales revenue budget of $118 billion for 2020/21 is projected to fall short of its annual target. This is still the case even if we assume the final four plots of the year are successfully sold and accounted for. The shortfall has been attributed to the lower volume of supply of both commercial and residential land and also of the withdrawal of two commercial sites due to aggressive valuations from the government."

“The challenge ahead includes the release of the tender documents for the Kwu Tong and Caroline Hill Road sites and if the tender will close date will be before the end of quarter. With only two months remaining in the financial year, which also includes the Chinese New Year holiday, there might not be sufficient time to achieve a sale on these two sites. The market expects Kwu Tong and Caroline Hill Road to generate circa $26 billion in total. Assuming The Peak and Kai Tak sites, the other two sites currently under tender in this quarter, could be sold for some $17.5 billion with no major land premium cases, the Lands Department will only deliver 54% ($63.7 billion) of the annual budget based on current market estimations”, added Lau.  

Cost-conscious occupiers drive office activity   

Office leasing momentum softened in 2020, with total net absorption falling to a record low of -1.8 million sq. ft. Central accounted for around one-third (-0.6 million sq. ft.) of the overall negative net take-up, with some multinational corporations opting to downsize their space or relocate to other decentralised submarkets. This has led to a rise in the CBD’s vacancy rates, which jumped to 7.7% by the end of 2020.

Fiona Ngan, Head of Office Services | Hong Kong commented: “Throughout the office leasing sector, the focus for occupiers is cost optimisation. As workplace operations are still evolving due to work from home policies, businesses are looking to manage operational expenditure where possible to remain resilient. The opportunity for cost-conscious occupiers is that we expect to see a front-loaded rental decline and for the rents to bottom out in the first half of 2021. This should serve as a call to action for all occupiers to review their real estate strategy and seek to renew lease terms in the first half of the year.

“Central’s vacancy rates are at a 10-year high, but despite seeing occupiers reduce their footprint it also provides more options for new tenants to come in a traditionally difficult market to enter. We also believe Mainland firms will gradually take up more office space in the CBD, albeit at a slower rate than what was experienced in 2015; and the robust IPO market and cross-border financial initiatives will provide impetus building on the demand from Mainland finance firms and wealth management companies,” added Ngan.

The worst of the retail sector’s rental decline has passed  

In 2020, retail rental rates and sales saw a significant YOY decline which resulted in a two-year period of noteworthy negative growth for the sector. High street rental rates decreased by -28% YOY in 2020, following a drop of -21% YOY in 2019. The pandemic has restricted Hong Kong’s inbound tourism, further weighing on the retail sales, which dropped 25% YOY for the January to November 2020 period.

Cynthia Ng, Senior Director of Retail Services commented: “There have been clear trends in the retail sector as a result of the pandemic with growth and resilience for the supermarket, home living and new concept F&B sectors. Retail sales in the supermarkets segment saw growth of 9.5% YOY (Jan-Nov 2020), while overall retail sales were down by 25%. Local consumption will remain the key focus for 2021 with landlords being more willing to bring in less traditional brands with a story to tell, negotiate flexible lease terms, marketing festive pop-up stores, and further driving the customer loyalty programmes & rewards.

“In 2021, we forecast that rental rates will remain flat against a back drop of anticipated momentum building in the market in the second half of the year, with the potential re-opening of borders and the gradual relaxation in domestic social restrictions as a result of the launch vaccination programmes,” added Ng.

Find out more about Colliers International Hong Kong’s Market Outlook 2021 by clicking here.

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