Hong Kong InvestmentAsian Cities Report – 1H 2020

REPORT

Savills Research

savills.com.hk/research

Hong Kong Investment

A market looking past COVID-19

HONG KONG’S REAL ESTATE MARKET: HOPEFUL OR HOPELESS FUTURE?After a fi ve-month battle with COVID-19, Hong Kong is looking toward a post-virus recovery. Social distancing is set to ease in June, with some business establishments gradually being allowed to reopen. However, the COVID-19 pandemic has weighed heavily on a wide range of economic activities. GDP shrank 8.9% in the fi rst quarter, while unemployment rose to 5.2% in April, its highest level since 2009. According to Real Capital Analytics, investment volumes for commercial properties1 fell by 89.5% YoY to US$1,182 million in Q1/2020, with the offi ce and retail sectors registering a drop of 96% and 90% YoY respectively (Table 1). Inbound investment, even from China, has largely ceased.

OFFICE MARKET DISRUPTIONDuring the outbreak, both public and private sectors adopted work from home (WFH) practices to maintain productivity. Some argue that this has led to a structural change and that remote working will replace the physical offi ce. However, the need for face-to-face communication is still an essential part of traditional businesses as physical interaction does not only foster innovation, but also helps to provide a personal touch and maintains long-term relationships with clients and colleagues. COVID-19 showed that fi rms can operate with both a physical and a virtual presence. In the long term, companies may allow 10% to 20% of their workforce to adopt WFH practices in order to reduce costs.

Amid the economic downturn, traditional businesses are either downsizing or relocating to non-core districts, while co-working operators have opted to 1 Commercial properties include offi ce, retail, industrial and hotel

GRAPH 1: Hong Kong Inbound Investment, 2020 (January to May)

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Source Real Capital Analytics

PROPERTY

TYPE

INVESTMENT VOLUMES NUMBER OF PROPERTIES TRANSACTED YIELD

2020 JAN TO MAY

(US$ MILLION)

2019 JAN TO MAY

(US$ MILLION)YOY CHANGE 2020 JAN TO MAY 2019 JAN TO MAY YOY CHANGE Q1/2020

Industrial 470.2 1,398.2 -66% 12 46 (-34) 3.0%

Retail 314.8 3,215.1 -90% 16 59 (-43) 1.9%

Offi ce 260.9 6,158.0 -96% 12 70 (-58) 2.8%

Hotel 136.0 445.8 -69% 3 5 (-2) -

Total 1,181.9 11,217.0 -83% 43 180 (-137)

TABLE 1: Hong Kong Investment Volume, 2020 (January to May)*

Source Real Capital Analytics, Savills Research & Consultancy* Deal size> US$10m and closed deal only

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While the city seems to have successfully dealt with COVID-19, old trade and political tensions have returned to introduce new uncertainties.

Hong Kong Investment

trim their footprint in the city. Grade A offi ce rents in Central fell by 6.2% YoY in Q1/2020, while the vacancy rate rose to 5.4% in May. Decentralisation remains popular because of the substantial 80% rental diff erence between Central and other business districts. In the co-working sphere, about 570,000 sq ft of space has been surrendered or has closed altogether since 2019. For example, WeWork has recently surrendered three lease commitments in Wharf’s Harbour City complex, the Harbourside HQ in Ngau Tau Kok and Hysan Place in Causeway Bay. Given a weakening economy, Grade A offi ce rents are projected to fall by 20% in 2020.

RETAIL AND HOSPITALITY - RECOVERY FAR FROM CERTAINThe containment measures have brought tourism to a standstill as visitor arrivals dropped to fewer than 100 a day in April 2020and some of Hong Kong’s biggest developers have postponed the opening of new hotels in the city. A survey by the Hong Kong Retail Management Association predicts that one in four retail stores (about 15,200 stores) could disappear by the end of this year, if retail sales remain weak. Luxury brands such as Louis Vuitton closed its 10,000 sq ft store in Times Square. Although some landlords have provided rental relief of 30% to 50%, the outlook for the retail sector remains challenging, and vacancies are expected to rise over the second half of 2020. From Q1/2019 to Q1/2020, the prime shopping street rents dropped by 43% YoY, erasing all gains since 2011, whereas shopping centre rents fell by 39% YoY, returning to 2003 levels.

In a post-pandemic world, there will be a shift in preference among travelers. Tourists will opt for short haul travel as many long-haul fl ights are not expected to resume until Q4/2020, and they will place greater emphasis on hygiene standards in hotels and shopping malls. On the retailer front, the lower rental costs will attract newcomers to the Hong Kong market. Existing retailers will have to innovate with both their offl ine and online strategies to stay competitive. More pop-up stores could appear as landlords are expected to off er shorter leases.

INDUSTRIAL MARKET - RELATIVELY STABLEIndustrial properties remained the most insulated from the downturn. Vacancy rates increased slightly from 2.2% in Q4/2019 to 2.9% in Q1/2020, and the rents posted a milder-than-expected decline of 1.2%QoQ and 1.8% QoQ respectively for overall and modern warehouses in the fi rst quarter, as many landlords were reluctant to provide rental concessions. Industrial sites and buildings with redevelopment potential will continue to attract buyer interest as developers are eager to replenish commercial landbanks. Benefi ting by our proximality to China and e-commerce growth, the industrial sector is expected to see a faster rebound than other sectors.

OUTLOOK Hong Kong’s economy has been aff ected by both internal and external uncertainties. While the economy is already on the ropes, the proposed national security law has created another uncertainty, with many worried about another round of protests and the impact on the retail and hotel sectors.

Because of the political uncertainty, we remain cautious on the commercial property sectors, particularly the retail sector. We expect investment activity to rebound in late 2020 if travel restrictions are fi nally lifted. Domestic capital, primarily affl uent individuals and family offi ces, will capture a higher share of deals this year. A revival of the Hong Kong IPO market later this year could provide some support to offi ce demand. Industrial properties including data centres are expected to fare reasonably well given the growth of e-commerce and the introduction of fi fth-generation wireless internet coverage.

GRAPH 4: Godown and Flatted Factory Rental Indices, Q1/2003 to Q1/2020

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Source Savills Research & Consultancy

GRAPH 2: Grade A Offi ce Vacancy Rates, January 2003 to May 2020

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Central Wanchai/Causeway BayTsim Sha Tsui Island EastKowloon East Western Corridor

%Source Savills Research & Consultancy

(CSW/Kwai Chung/Tsuen Wan)

GRAPH 3: Savills Prime Street Shop and Major Shopping Centre Rental Indices, Q1/1997 to Q1/2020

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Source Savills Research & Consultancy

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