Increased liquidity continues to drive Hong Kong sales

Hong Kong's property sales activity and price growth have notably dominated the real estate market for the first half of 2009, even though both the local and the global economy are yet to see promising improvements.

However, with increased liquidity in the market, capital values are expected to improve and rental decline will taper off in the next twelve months.  The remarks underlined the mid-year review and forecast announced by Colliers International today.

For the past six months, the economic fundamentals still faced various uncertainties, occupational demands therefore remained subdued, causing downward pressure on rentals particularly in the Grade A office sector.  While the leasing sectors have yet to recover, the decline rate is expected to ease off.  In contrast, luxury residential prices have picked up drastically.  There has been a notable increase of investment sales activities.  Positive growth in the sales sector will continue.

"Many investment institutions are net sellers or they stay at the sideline looking for assets with high yields.  Currently, the cash-rich private investors are the active buyers in the market," said Richard Kirke, Managing Director of Colliers International Hong Kong.  "With the high interbank liquidity, the anticipation of approaching the bottom of the downturn cycle and possible inflation stimulates buying demand.  With limited attractive fields to invest, a huge volume of funds flow into various asset classes, including the real estate sector in Hong Kong.  This explains the resilience of the sales market in the first half of 2009."

Investment Sales
The investment market has benefited from the high level of liquidity.  Furthermore, the rise of stock market prices stimulated investment sentiment.

"Despite a mild drop of 2% YoY to HK$16,244 million in the total value of property investment transaction in 1H 2009, the investment market showed signs of improvement. The number of transactions rose by 12.5% YoY to 162 cases during the same period," said Antonio Wu, Regional Director of Asia Investment Sales.  "Half of the total investment transactions in 1H 2009 were concluded in May and June, with cash-rich local investors and families as the major buyers.  Also, the transacted properties were mainly retail and strata-title office units."

"Looking forward to the next six months, the office and retail sectors will continue to be the focus in the investment market, although their yields are expected to compress further," anticipated Antonio.  "Local investors and prestige families will remain active in snapping up opportunities in the marketplace.  As the investment sentiment builds up gradually, more benchmark transactions are expected to see in the next six months."

Grade A Office
Weak occupational demand has been the major challenge for the Grade A office leasing market, of which the rentals fell 12% quarter-on-quarter (QoQ) in 2Q 2009 and 24% since the beginning of 2009. 

"With virtually no recovery in demand, existing tenants continue to seek ways to cut their operating cost.  Rental savings have become a key point of consideration when selection a leasing solution," said Simon Lo, Director of Research and Advisory.

"Many existing tenants now opt to downgrade their offices, in order to reduce their office occupancy cost.  Lately, key relocation examples include companies moving their offices from Causeway Bay to Kowloon East, where rentals are relatively lower and a number of new buildings are available," added Simon.

As positive signs in the leasing market have yet to be seen, Grade A office rentals are projected to decrease 15% in the next twelve months, and the market is likely to bottom in mid-2010.  Meanwhile, Grade A office prices are anticipated to fall 5% during the same period.

Luxury Residential
Among the key property sectors, the luxury residential sales market outperformed in Hong Kong in 1H 2009, both in terms of the volume and prices.  "For properties valued at HK$50 million or above in traditional luxury residential districts, the number of transactions increased by 114%, the total turnover by 92% and the unit prices by 23% in 1H 2009 when compared to 2H 2008," said Ricky Poon, Executive Director of Residential Sales.  "And there were individual luxury residential transactions of which the prices exceeded the level achieved before the financial crisis last year."

"With the low interest rate offered by local banks, anticipation of economic stabilisation in a near future and the limited supply, luxury residential prices are projected to grow over 5% in the next six to twelve months," added Ricky.  "Meanwhile, the rental yield is anticipated to range between 2.5% and 2.8%."

On the luxury residential leasing front, rentals are expected to edge down 3% in the next twelve months.

Industrial
The uninspiring re-export performance in 1H 2009 clouded the local industrial market.  The weak trade activity dampened the leasing demand, which translated into a fall in rentals.  Industrial rentals dropped 5% QoQ in 2Q 2009 and fell 10% year-to-date.  However, due to the funds inflow, prices of industrial properties registered an increase of 6% QoQ in 2Q 2009.

"Similar to the office sector, occupiers were prompted to downgrade to buildings of lower rents in order to keep their costs low," said Simon.  "In the next twelve months, industrial rentals and prices are projected to drop 14% and 9% respectively."

Retail
Local retail sales have seen negative growth since February 2009.  This created a subdued atmosphere among retailers.  A greater number of vacant shops were available for lease.  The weak market was also reflected in the fall of retail rents in core shopping areas, down by 5% QoQ in 2Q 2009 and 8% year-to-date.  "Underpinned by the spending of Mainland China visitors and local consumption, cosmetics and food & beverage have been the most resilient sectors in the retail market," said Simon.   "However, the consumer durables sector faces major challenges with consumers controlling their spending amid the economic slowdown."

According to Colliers International, retail property rentals for ground-floor shops in core shopping areas are forecast to drop further by 12% in the next twelve months. The retail property prices in core areas are expected to move along the sideline during the same period.