HK's property market sees good sales, low rental values (July 30, 2009)

KUALA LUMPUR: The Hong Kong property market is being pulled in two directions. On one hand, sales are rising but leases are heading south. According to the Colliers International Hong Kong 2Q2009 property report, the market mood is still conservative but investors are snapping up properties to ensure they are in good position to reap the benefits when the global economy recovers. Due to ample liquidity and with near zero interest rates, real estate purchasers, including a number of local private investors, have entered the office market in anticipation of a global economic recovery in 4Q2009 to achieve capital gains, says the report.

As a result, prices have increased in 2Q. For example, the average asking price for strata-titled office buildings in Admiralty rose to between HK$10,000 (RM4,575) and HK$13,000 psf compared with between HK$8,000 and HK$9,000 psf in the previous quarter.

Rental, on the other hand, have gone down, with tenants preferring to play it safe with downgrades to less expensive offices or second-tier buildings. The vacancy rate across the various business districts increased from 7.43% in February to 7.89% in 2Q2009.

Overall, Colliers predicts that Grade A office rentals will see a further slide of 15% over the next 12 months unless there is a change in the economic climate.

The luxury residential sector also saw an increase in sales in 2Q2009, thanks to mortgage rates of as low as 1% per annum, making investment buying attractive. The number of sales in the three traditional luxury residential districts of The Peak, Mid-levels and South Side all saw leaps of more then 100%.

The market on the leasing front is, however, weak -- thanks to the low occupational demand for luxury units by multinational companies' employees. A number of tenants have opted for cheaper areas due to tightening purse strings.

Colliers says luxury residential capital values should rise by 5% over the next 12 months, although rentals are likely to edge down 3% during the same period.

Transactions in the industrial sector rose 129% quarter-on-quarter (q-o-q) from 393 in March 2009, the lowest level since 1999, to 900 in May 2009. The most active areas were the industrial districts of Kwai Chung/Tsuen Wan and Kowloon East.

There was a rather subdued feeling in terms of leasing due to the global recession. Although individual warehouses are taking advantage of the market downturn to upgrade their premises to be in prime position when the economy recovers, tenants remain cautious when it comes to rental expenses. As a result, industrial rentals are expected to fall by 5% to 15% over the next 12 months.

The drop in tourist numbers, the A(HINI) flu pandemic and the global slowdown have contributed to a downward trend in the rents of retail property. The average retail rent in the traditional shopping districts of Central Causeway Bay, Mong Kok and Tsim Sha Tsui showed a decrease of 4.7% q-o-q in 2Q2009, compared with the fall of 3.1% q-o-q in 1Q2009. Colliers predicts rentals will decline by another 12% over the next 12 months.

Meanwhile, investment buying has grown, thanks to increased capital inflow and more relaxed lending policies by local banks. The number of major transactions with lump sum considerations of HK$10 million or above increased by 70% q-o-q.