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Retail Outperformed All Property Sectors in 2011 - Hong Kong Annual Property Review

Overall market expected to stabilise in second half of next year


HONG KONG, 6 December 2011 — Riding on the positive market sentiment in 2010, the Hong Kong property market experienced a robust growth in the first half of 2011 before slowing down due to the cloudy global economic outlook in the second half of the year. Overall, the retail segment outperformed the rest of the property sectors thanks to the strong growth in inbound tourism. Nonetheless, the property market is expected to remain sluggish in 1H12, according to Jones Lang LaSalle in its Hong Kong Real Estate Market Review 2011 today.

Office Market
The Grade A office market started strongly with buoyant demand in the first half of 2011. However, concerns over the growing global economic uncertainties softened expansion demand since mid-year and, together with a low-vacancy environment, resulted in a relative slowdown in net absorption. Overall net take-up of commercial Grade A office space in the first 11 months amounted to 1.9 million sq ft (net), a marked decline from the 3.5 million sq ft (net) in 2010.

While there was a slowdown in absorption as corporates reconsider their expansion plans, the market saw considerable demand from companies seeking for cost-saving relocation opportunities – especially those from Central – to more affordable options in other sub-markets. Indeed, such relocations dominated the leasing activities in 2011 with Kowloon East continuing to be a popular sub-market of choice and remaining a key contributor to net take-up this year.

The relocation trend also helped drive vacancy rates lower. All sub-markets except for Central saw lower vacancy rates compared with that of end-2010, with most of them down to 2–3% levels. As at end of November, the overall vacancy rate stood at 4.2%, down from 4.7% as of end-2010.
Rents continued to grow in the first three quarters of 2011 before experiencing some pressures in 4Q11. The fourth quarter saw average rents in Central softening and pulling rents in the Overall market down marginally by 1.1%. The first eleven months saw rents in the Overall market rising by 16.4%, while those in Central increased by 12.2%. The strongest rental growth was seen in Hong Kong East (25.2%) and Kowloon East (23.1%), where landlords continued to benefit from the strong cost-saving relocation demand throughout the year.

Similar to the leasing market, the Grade A office sales market was active in 1H11 before slowing down more noticeably going into the second half. The slowdown in the more recent months was due to a number of reasons, including the rising difficulty in obtaining bank credits, higher borrowing costs and signs of rental pressure in some sub-markets. The year 2011 saw Grade A office capital values rising by an average of 19.8%, with the strongest growth witnessed in Wanchai/Causeway Bay, which went up by 24.0%.

Gavin Morgan, Deputy Managing Director and Head of Leasing of Jones Lang LaSalle Hong Kong, remarked, ‘Given the gloomy economic outlook, companies remain cautious towards expansion, which will curb office demand in the short term and put temporary pressure on the rental in core business districts. However, given the tight supply pipeline and low vacancy environment, the rental correction is likely to be short-lived. In fact, we expect the correction to stabilise in the second half of next year, and Hong Kong will likely be included in the first batch of cities to see a rebound.’

Hong Kong Prime Office Indicator – % Change

Sub-Market
Capital Values
(Jan–Nov 2011)
Rents
(Jan–Nov 2011)
Vacancy Rates
(Nov 2011)
Central
+20.7%
+12.2%
3.6%
Wanchai/ Causeway Bay

+24.0%

+21.6%
2.0%
Hong Kong East
+15.5%
+25.2%
3.2%
Tsimshatsui
+10.8%
+19.2%
2.2%
Kowloon East
+20.4%
+23.1%
9.2%
Overall
+19.8%
+16.4%
4.2%

Retail Market
The burgeoning tourism industry continued to provide support to Hong Kong’s retail property sector as 2011 recorded another strong year of growth in visitor arrival, which jumped 16.2% to 34.2 million from January to October. Chinese tourists, which grew 23.7% so far this year, continued to have the lion’s share and accounted for 67% of all tourist arrivals. Apart from the robust tourism sector, local consumption also posted sustained growth as private consumption expenditure grew by 8.9% in the first three quarters of the year. As a result, retail sales surged 25.2% in the year to October, surpassing the 18.3% growth in 2010.
Demand for upmarket and luxury items continued to be strong in 2011, as was the case in recent years, with the number of watch and jewellery retailers soaring by 380% from 2010.

The strong demand has also pushed rents higher in the core shopping districts, allowing most landlords to enjoy enormous rental growth upon lease expiry. Notwithstanding the spiking rents, foreign retailers continued their aggressive expansion in order to capture the lavish tourist spending. The sustained leasing demand drove rents for high street shops and prime shopping malls to grow by 18.7% and 12.0% respectively in the first 11 months of 2011. This was in spite of the fact that some local-oriented retailers had started to adopt a more cautious approach entering the fourth quarter.

Although the recent months saw a slowdown in momentum in the investment market, capital values for high street shops rose a further 33.0%, after growing by 36% last year.
Tom Gaffney, Head of Retail at Jones Lang LaSalle Hong Kong, said, ‘The growing uncertainties in the global economy may affect local consumption confidence in the near term, but the impact on luxury brands and other tourist-oriented trades should be minimal. Indeed, international retailers remained optimistic on Hong Kong and many of them are still looking for new set-up opportunities here. However, with a higher base of comparison and some local-oriented retailers possibly adopting a more cautious approach, rental growth is expected to slow in 2012. In general, we expect that retail will continue to outperform the other property sectors in 2012, with rents holding relatively firm.’

Hong Kong Prime Retail Indicator – % Change

Sector
Capital Values
(Jan–Nov 2011)
Rents
(Jan–Nov 2011)
High Street Shops
+32.6%
+18.7%
Prime Shopping Centres

N/A

+12.0%

Residential Market
Despite the reduced pool of buyers after the launch of Special Stamp Duty, sales volume of the residential market remained robust as it recorded an average of about 9,200 units a month in 1H11, compared with the 11,300 units a month average witnessed last year. However, transaction volume fell to just about 5,000 units a month in 2H11, with a slowdown in purchase demand more noticeable in the secondary market. The first eleven months of 2011 saw the number of residential sales and purchase agreements fall by 37% y-o-y to a total of 80,161.

The slowdown was attributable to a combination of factors, including the higher loan-to-value requirements for homebuyers, higher interest rates for new mortgages and the rising uncertainties in the global economy which led to weaker buyers’ confidence. The low holding costs for existing property owners also helped to postpone selling decisions, thus leaving the sales market with fewer transactions.
Indeed, the slowing demand was seen across all price segments and thus luxury properties were of no exception. In the first 11 months of the year, a total of 2,480 residential properties worth over HKD 20 million were sold, 16% lower than that in 2010.

Despite the sharp decline in sales volume, property prices were able to hold relatively firm in 1H11. The second half of the year, however, started to see mass residential prices falling mildly, down about 5% in the last four months, pulling the full-year growth back down to 4.6% from the 10.2% growth in 1H11. Luxury residential prices followed the downward trend of the mass market, but falling by a lesser magnitude in recent months. After rising by 16.2% in 1H11, capital values of luxury residential fell by 3.9% in 2H11, bringing the full-year growth to 11.7%.

The leasing market was also affected, due mainly to the sluggish corporate expansion activity in 2H11, reducing demand for luxury residential leasing for expatriate staff. Rents for luxury properties edged down marginally by less than 1% in 2H11 after rising by about 5% in 1H11, resulting in the full-year growth to stand at 4.3%.

Hong Kong Prime Residential Indicator – % Change

Sector
Capital Values
(Jan–Nov 2011)
Rents
(Jan–Nov 2011)
Luxury
+11.7%
+4.3%
Mass
+4.6%
N/A

During the year, developers showed sustained interest in development sites and continued to replenish their land banks amidst a sluggish sales market. A total of 18 residential sites, which were sold by both auction and tender in the year-to-date fetching a total of HKD 42.6 billion, are expected to provide some 8,500 units to the market upon their completions starting from late-2014.

Joseph Tsang, Managing Director of Jones Lang LaSalle Hong Kong, said, ‘We expect the slow momentum will extend into 2012. Buying interest will remain soft on the back of global economic uncertainties, and market activity will stay slow as buyers and sellers continue to take a wait-and-see approach. Residential capital values will inevitably soften as demand continues to fall, and the leasing market will also be affected as companies hold back expansion plans. However, the fact that new supply is expected to remain tight in the next 12–24 months and holding costs to remain low will limit fire sales in the market and prevent a noticeable collapse in capital values.’
 
Investment Market
The investment market experienced robust performance in 1H11, with nearly 60% of the total considerations achieved for the full year secured in the first half of the year. However, the sales momentum slowed significantly and the market turned sluggish going into 2H11. Except for the sale of Festival Walk in July, deals concluded since the mid-year have been relatively thin. The signs of rents peaking in the office sector, for instance, have made investors increasingly cautious in recent months.

From January to November, a total of 262 transactions were registered for properties at over HKD 100 million (excluding land auctions) in 2011, with total considerations reaching over HKD 123 billion, which surpassed the HKD 118 billion recorded in 2010. Investment focus was largely on retail (48% of total considerations) and residential (23%), followed by office (21%) and industrial (8%).

‘Looking ahead at 2012, we expect to see another slow year on the back of economic uncertainties and higher yield expectations. Sales momentum is expected to remain slow, while the uncertainties persisting in the lending market may affect buyers’ affordability. However, the landlords’ relatively healthy financial positions will prevent much fire sale activity and the tight future supply environment across all sectors will induce landlords to prolong their holding periods,’ Tsang commented.

Warehouse Market
The trade sector enjoyed a robust start in 1Q11 before it dwindled from 2Q11 onwards, mainly due to weaker global demand which also affected China’s trade growth. This was, however, partly offset by a pick-up in demand from domestic retailers and 3PL operators specialising in local distribution, supported by the strong domestic retail sales which grew by 25% y-o-y through the first nine months of the year.

Warehouse leasing activity in 2011 was largely driven by expansion requirements and cost-saving relocations. Vacancy rates, which were already down to 3.1% at the start of the year, continued to decline across the market throughout the year, going down to less than 1% in some portfolios. The sharp contraction in vacancy rates gave landlords the opportunity to push up warehouse rents to new record highs in 2011, rising by 14.2% for the whole of 2011. Capital values also continued to extend their already record-high levels. With the influx of speculators entering the broader industrial market early in the year, capital values went up by 21% in 2011.

Hong Kong Warehouse Indicator – % Change

Sector
Capital Values
(Jan–Nov 2011)
Rent
(Jan–Nov 2011)
Warehouse
+21%
+14.2%

Marcos Chan, Head of Research of Greater Pearl River Delta at Jones Lang LaSalle, said, ‘Uncertainties over the global economy and trade markets will continue to weigh on the warehouse leasing market. With most retailers and local distributors having already executed their expansion plans in 2011, domestic-driven demand is expected to ease in 2012. Returning stock to the market, coupled with the likelihood for tenant downsizing, will put pressure on vacancy rates. Against the backdrop of a potentially rising vacancy and the slowing investment demand, we expect to see adjustments in both rents and capital values in 2012.’