High Interest Rates Set to Impact Residential Prices Through 1H 2024, End-Users to Drive CRE Investment Market

• 2023 YTD Grade A office net absorption (as of mid-November) was negative at –267,100 sq ft NFA; rents remained under pressure, down 7.2% YTD.
• The retail market continued its gradual recovery process, with average high street vacancy rates in Q4 dropping further to 8.2%; high street rents increased in a range of 5%–10% in 2023.
• The high interest rate environment and stock market volatility have slowed the residential market, with 2023 full-year transaction numbers expected to be at a 10-year low; prices to fall by around 5% this year and by 0%–5% in 1H 2024.
• Capital market sentiment remained cautious, with large-sized deal (non-residential, exceeding HK$100 million) investment volume in 2023 YTD (as of December 5) recorded at HK$39.7 billion, down 33% from the 2022 full year. Investment transactions were mainly driven by local capital and end-users.

HONG KONG SAR - Media OutReach Newswire - 7 December 2023 - Global real estate services firm Cushman & Wakefield today held its Hong Kong Property Markets 2023 Review and 2024 Outlook press conference. Corporate occupiers have remained cautious through 2023 in the face of an uncertain global economic recovery. Consequently, new office leasing demand has stayed relatively subdued, in turn exerting further pressure on office rental levels. In the retail industry, overall sentiment continued to improve, supported by the border reopening and the return of tourists, and with the growing presence of experiential retail strategies providing a new impetus to the industry's growth potential. However, the persistent high interest rate environment coupled with stock market volatility have dampened home purchase sentiment, with the residential market witnessing declines in both transaction numbers and prices. In the CRE investment market, end-users are becoming the primary drivers of activity. Grade A office leasing market: Positive net absorption returned in Q4, but high availability continues to weigh on rents Overall Grade A office net absorption in Q4 2023 totaled 379,700 sq ft as at mid-November, mainly driven by pre-committed space at a newly completed office building in Kowloon West. The Kowloon West submarket alone registered net absorption of 334,200 sq ft, while all other submarkets, with the exception of Greater Central, also returned to positive territory. In terms of new leasing activities, the Insurance sector accounted for the highest share of new leases by area, at 39% of the total, predominately due to a significant pre-leasing requirement. The Banking & Finance sector took 14% of new leases by area, followed by the Public sector at 13%. In reviewing 2023, the overall business environment has remained cautious amid the prevailing global economic uncertainty, with cost savings a top priority for occupiers. As a result, the office leasing market has yet to see a significant rebound even after the border reopening. Overall absorption for the YTD up to mid-November remained in negative territory at –267,100 sq ft, in turn pushing the availability rate up to 18.0%. This has forced office rents to remain under pressure, dropping by 7.2% for the YTD as of the end of November (Chart 1). John Siu, Managing Director, Head of Project and Occupier Services, Hong Kong, Cushman & Wakefield,said, "After the border reopening, the recovery in office leasing momentum has been slower than the market expectation. If accounting for the remaining new supply potentially to be completed before 2023 year-end, the availability rate could surpass 19% by then, exceeding the record high of 18.1% in Q1 2004. In addition, with nearly 1.2 million sq ft of new office supply being scheduled next year, we forecast that office rents will continue to adjust downwards by 7% to 9% in 2024, providing greater options of quality office spaces with attractive pricing for occupiers planning for upgrades or relocation." Retail leasing market: High street vacancy rates further declined, supporting steady rental recovery The gradual return of tourists continued to drive Hong Kong's retail market recovery, with total retail sales amounting to HK$336.1 billion for January to October 2023, an increase of 17.2% y-o-y, although coming from the low base of last year. The Jewellery & Watches retail category recorded the most significant growth at 55.0% y-o-y, while Fashion & Accessories and Medicines & Cosmetics also rose by approximately 40% y-o-y. Jewellery & Watches brands, together with Medicines & Cosmetics stores, continued to expand their presence in core locations in Q4, prompting the overall vacancy rate to drop further from the levels seen in the last three years. The vacancy rate in Causeway Bay, a traditional tourist shopping district, dropped to 2.6%, similar to its 2019 level. The vacancy rate in Tsim...