Commercial investment market spirals downward as office and prime street shops take heavy hit

Office rents will slow to 2-4% growth in 2019 from 8-10% expansion in the previous year.

Hong Kong’s commercial investment market is unlikely to replicate its positive performance in 2018 as the sector bears the growing weight of rising interest rates, a slowing Chinese economy and the ongoing trade dispute, according to real estate consultant Savills. 

Office rents rose by 8-10% and retail rents gained 2-4% in 2018 as the sustained influx of Mainland firms and tourists bode well for the health of both sectors.

However, the situation is going to increasingly mimic the slowdown in the residential market as office rents are set to slow to 2.5-5% growth whilst shopping centres and prime street shops will eke out measly 2% gains on the rental front, Simon Smith, analyst at Savills Research in a report. 

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The heated uptrend in the Grade A office sector, which lasted 29 consecutive months, has already been broken with average prices declining 4.7% overall. This marks the first downtrend since 2015 when the first interest rate hike in the US took place. 

The Kowloon commercial market, which is home to a number of trade-related businesses, was particularly hard hit with prices dropping by 7.0%, 5.8% and 4.0% in Tsim Sha Tsui, Kowloon East and Kowloon West in Q4. 

“The close connection between stock valuations and property prices means the 20% correction in the equities market over 2018 could manifest in softening property prices a quarter, perhaps two, from now,” said Smith. 

In Central/Admiralty, Grade A office rents are set to drop 3.8% by end-2019 and citywide rents to flatten, according to an earlier report from Colliers, to follow the downward spiral of the benchmark Hang Seng Index (HSI).

Financial stocks have a 48% weighting in the HSI and financial tenants occupy 54% of premium office stock in the CBD, Colliers noted. As a result, the office sectors of Hong Kong and Seoul are directly tied to the performance of the stock market unlike their regional peers Singapore and Shanghai where rents are relatively insulated from the market downturn.

The tightening monetary policy will also hasten the sector’s downtrend as the prime and HIBOR rates have started to climb in September 18 to hit the office market in terms of both sentiment and prices. Moreover, the slowdown in China’s economy will also be felt in the commercial market. “With PRC firms the bloodline of the Grade A office market in Central, an economic slide could trickle down to rents and values,” added Smith.

Also read: Hong Kong beats US and UK as top destination for Chinese property capital

Included among 2019’s headwinds are the dual threats of a potentially protracted Sino-US trade war which negatively affects consumer spending and causes stock market volatility.

Luxury retailers, in particular, held back on their expansion plans to push down transactions in prime street shops and year-end prices to 2.1% in Q4.