Hong Kong market continued to see solid fundamental support with stronger-than-expected economic growth of 7.1% year-on-year (YoY) in 1Q 2008, despite the challenges of external environment such as volatility of financial markets and the increasing energy prices. As food and energy prices surged around the globe, the pace of price rise picked up additional momentum. Given the prevailing effective mortgage rate at 3.00% and inflation running about 5.00% in 2008, the local real estate market continued to see a negative interest rate environment in 2Q 2008, which was favourable for real estate investment. In general, property prices and rentals in the four key sectors continued to see positive growth in 2Q 2008.
Office Sector
In 2Q 2008, the average Grade A office rentals increased further by 4.9% quarter-on-quarter (QoQ) to HK$77.32 per sq ft per month as at the end of May 2008, thanks to the sustained demand in the marketplace. However, the overall pace of rental growth tapered off significantly during 2Q 2008. As the average effective rentals in Central edged close to HK$120 per sq ft per month in 2Q 2008, individual companies including professional firms hesitated to commit new space since the prevailing rental levels had already surpassed their affordable rental levels. Due to a steep rental discount of over 50% in fringe business areas e.g. Causeway Bay on Hong Kong Island comparing to Central, a number of non-finance companies are seriously considering relocating out of Central for potential rental savings and the availability of floor space to meet their requirements.
Looking forward, the pace of rental growth in the local Grade A office market is going to taper off further in anticipation of more office stock coming on line in the second half of 2008. The Grade A office rentals are predicted to rise by 15% in the next 12 months.
Luxury Residential Sector
In 2Q 2008, the number of sale transactions in the luxury residential property sector reduced by over 30% QoQ. Notwithstanding the uninspiring sales volume, the average transacted price increased 8.2% QoQ to HK$14,868 per sq ft as at the end of May 2008, thanks to the limited supply of luxury stock, sustained occupational demand and the general expectations of growing inflation. In the next 12 months, the pace of capital value growth is expected to slow to 5-10%, with the underlying risks of a global economic contraction and the expectation of a tightening cycle.
In the luxury residential leasing market, the lack of new supply, tight supply conditions in the secondary market and positive hiring expectations amongst various industries continued to underpin the rentals’ growth momentum. The average luxury residential rental registered a rise of 6.7% QoQ to HK$45.24 per sq ft per month as at the end of May 2008, and is expected to grow 15% in the next 12 months.
Industrial Sector
During 2Q 2008, the demand for logistics warehouses showed no signs of abating. Thanks to the continued growth of re-exports and rising demand for logistics facilities for local distribution, rentals in the warehousing sector edged up further in 2Q 2008. Meanwhile, the prevailing trend of companies relocating from core business districts to decentralized areas set the industrial-office property sector to benefit from a rental growth of 2.2% QoQ. In expectation of the prospective growth of intra-regional trade, industrial rentals and capital values are expected to rise 8% and 10% respectively in the next 12 months.
Retail Sector
The Hong Kong retail market continued to enjoy the benefits of an expanding local economy, a growing local consumer demand and a rising number of visitor arrivals. Taking the advantage of a low interest rate environment, investment demand in the retail sector remained solid in 2Q 2008 with individual benchmark sales transactions such as the sale of KCP in Kowloon City for HK$1.48 billion. In the leasing market, a rising number of inbound visitors, especially those from Mainland China, help offset the negative impact of anticipated slowdown in the US economy. In addition, the sustained growth of retail sales is one of the key drivers pushing retail tenants to go for their expansion plans. Underpinned by the sustained leasing demand, the average rentals in the traditional shopping districts saw a growth of 2.7% in 2Q 2008 and are expected to rise 15% in the next 12 months.
