Cushman & Wakefield Hong Kong: Office Rents Decline Further While Retail Outshines

HONG KONG, April 18, 2012 /PRNewswire-Asia/ -- Cushman & Wakefield, the world's largest privately owned real estate services firm, today released Q1 of 2012 trends for the Hong Kong commercial leasing, investment and residential markets, and its outlook for the remainder of 2012.

Office demand declines sharply, pushing rents down by 5.2% in Q1 of 2012

The slowdown in the overall economy, along with consolidation in the financial sector facilitated a decline in demand for office space in Greater Central in Q1 of 2012. Net absorption turned negative in the overall market, which was heavily impacted by the drop in leasing activity in Greater Central. Overall office rents adjusted downward by 5.2% quarter-on-quarter to an average of HK$66.00 per sq. ft. per month in Q1 of 2012, while the office availability rate increased by 1.2 percentage points during the quarter to 4.7%. The sizable decline in rents was largely underpinned by a 10.9% quarter-on-quarter drop in rents in Greater Central, where rents fell to an average of HK$ 105.40 per sq. ft. per month. John Siu, Executive Director of Cushman & Wakefield Hong Kong, said, "rents in Greater Central have fallen to a pre-2011 level. Landlords have precipitately cut rents as leasing activity has slowed considerably due to weaknesses in the global economy and difficulties facing the banking and finance industry. The continued murky outlook for the remainder of the year has enticed landlords to slash rents in order to secure and retain tenants". Siu further pointed out that unless European and American financial markets and economies improve substantially, rents in Greater Central are likely to drop by an additional 5 to 10% in the coming three quarters.

"Availability increased to 6.2% in Greater Central, the highest level the district has seen since early 2010," said Gary Fok, Senior Director, Head of Commercial of Cushman & Wakefield Hong Kong. "This increase represents not only the slowdown in office demand, but the implications of cost-cutting strategies amongst tenants and consolidation measures being implemented by some financial firms with premises in Greater Central. Some tenants whose tenure ends in H1 of 2012 have decided not to renew their leases, integrated departments into other premises or have terminated leases immediately." (See Figure 1)

Fok estimates that rents in Greater Central will decline at a rate of 5% to 10%, through the remainder of the year, and will slightly drag down rents in other districts. However, availability rates in other districts are at a low level. It is expected that the reduction in the next three quarters will be moderate, with availability ranging from 2% to 5%.

Retail market poised for continued growth in 2012

In the first two months of 2012, retail sales grew by 15.2% year-on-year, slightly below economists' expectations, but still impressive growth. Tourist arrivals from Mainland China continued to grow at an expedited pace, increasing by 19.7% in the first two months of the year. In lieu of a slowdown in the economy and local property market, combined with weakening exports, local consumers have grown somewhat more cautious and it is expected that retail sales growth will slightly attenuate in the ensuing months compared to 2011 levels.  Nevertheless, the local retail market will remain a target for expansion among international retailers. Michele Woo, Senior Director, Retail of Cushman & Wakefield Hong Kong, said, "with the global economy still on loose footing, global brands are keen on expanding to and within the local market due to attractive long-term growth prospects. Mainland visitors are continuing to come to Hong Kong to purchase everything from consumer durables to luxury goods, and therefore we expect demand to maintain its momentum and rents further appreciate." Prime street space and areas frequented by tourists will stay in high demand among luxury fashion brands and both local and international jewellery and watch retailers. The large run-up in rents will force more local retailers and middle-end brands out of prime street space upon lease expires. After seeing continued strong growth in Q1 of 2012, rents of prime street locations are in a position to see additional rent increases of 10% to 20% in 2012.

F&B operators benefitting from tourism and local consumption growth, hurt by rising operating costs

Strong wage growth in 2011 and robust tourism growth are continuing to support expansion of F&B operators in the city. However increasing rents and rising food and labour costs are forcing some operators to relocate and seek more cost efficient premises. Dennis Lau, Director, Retail of Cushman & Wakefield Hong Kong, said, "F&B tenants have been forced to relocate to secondary locations and ‘go vertical' or move to space at higher floors due to the rapid increase in rents and operating costs into Q1 of 2012. However, some tenants are still vying for prime locations. Rents for restaurants in Causeway Bay and Tsim Sha Tsui inched upward by 5% to 10% percent during the past quarter. Vendors have to increase prices due to rising food costs, which increased by roughly 8% year-on-year in February." Indicative of high inflation, growth in the value of restaurant receipts was 7.3% in Q4 of 2011, but real growth amounted to just 1.1%. Lau anticipates that the expansion of the F&B sector will slow slightly during the remainder of 2012, but not enough to keep rents from escalating. The slight slowdown in the economy has begun to push employment slightly upward and this should translate into moderating consumption growth. Nevertheless, we will continue to see strong tourism levels which will help supplant the effects of a slight reduction in local consumption. Rent for restaurants within prime retail areas will see additional growth of 10% to 15% in 2012.

Short-term slowdown not deterring investors

Kent Fong, Senior Director, Co-Head of Investment of Cushman & Wakefield Hong Kong, said, "although the investment market was quiet before Chinese New Year, the market has been picking up since. Both local as well as overseas investors have been showing interest in the local market. The purchase of 18 Kowloon East was finalized early in Q1 of 2012, having been bought by China Construction Bank for HK$ 2.51 billion. This represents one of largest sole office-use property transactions in recent years." Several other notable transactions were concluded in Q1 of 2012, including the sale of Bigfoot Centre in Causeway Bay which was transacted at HK$ 850 million.

Thanks to an increasing number of Mainland visitors, rents and revenues of retail properties and hotels, respectively, has increased dramatically. According to Hong Kong Tourism Board statistics, 42 million tourist arrivals were recorded in 2011, up by 16.4% compared to the 36 million in 2010. Mainland Chinese visitors account for most of the increase, whereas the number of arrivals increased by almost 24% year-on-year in 2011, jumping from 22.7 million to 28.1 million. In 2011, occupancy rate of mid-range hotels reached 93%, 3% higher than in 2010. Average room rates increased by 21.4% compared to 2010, ranging from $700 to $1,000 per night. Strong revenue growth has made the purchase of mid-range hotel properties highly attractive among investors. In the past nine months, the territory saw 10 transactions of mid-range hotels (See Table 2), with yields above 4%, which is deemed more attractive than the average return of 2% to 3% when investing in other properties such as retail shops and offices.

Fong elaborates that the long-term low interest rate environment has also driven the increase in investor activity. With the election result for Chief Executive recently announced, some investors will be cautious until new housing policies are announced by the government in order to make more informed decisions. Therefore, it is expected that large transaction market activity will slow slightly in Q2 of 2012. Nevertheless, the overall trend depends upon the global economy in the months to come and policy announcements of the new government.

Small to medium-sized flat prices to fall by up to 15% in 2012

Vincent Cheung, National Director of Valuation and Advisory of Cushman & Wakefield, Greater China, said, "local residential property market in Q1 of 2012, subsequent to the second half of 2011, continues to be stagnant, under the government measures and dragging economic recovery."

Investors remain conservative, leading to a further reduction in transactions. According to statistics of the Land Registry, 3,507 units were transacted in January, a drop of 56% year-on-year. This marks the first month since November 2011 that the number of transactions has fallen below 4,000 units (Figure 1). Despite a slight increase of 11% to 3,884 units by late February, the figure is still 63% lower than the level achieved a year ago. Although 11,358 units were transacted in March, a drop of 35% year-on-year was recorded in Q1 2012. According to Rating and Valuation Department, subsequent to the falling trend since the second half of 2011, home prices fell by approximately 1% and increased by approximately 1.8% month-on-month in January and February 2012, respectively. With less sales activity and falling prices, the number of homes available for lease has increased, placing pressure on rents. Rents of homes in January and February 2012 dropped by 2% and increased by 0.5%, respectively.

Moreover, it is noteworthy that due to greater risk facing investors since Q4 of 2011, mortgage rates have trended upward to approximately 2.5% to 3%, close to the rate of return in the private residential market. During the Easter holiday, a surge of newly constructed homes and promotional offers by banks forced mortgage rates down slightly. However, with the rate of return close to mortgage rates, investors' willingness to invest is undermined.

Looking forward to the next quarter, the global economy will remain bleak. With the new HKSAR government taking over, housing policies remain uncertain and investors remain conservative. It is believed that residential prices and transactions will stay flat. Overall, the prices of small and medium-sized flats will decline by 10% to 15%, and prices of luxury homes will fall by 5% to 10%.

About Cushman & Wakefield

Cushman & Wakefield is the world's largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world's major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 235 offices in 60 countries and more than 14,000 employees.  It offers a complete range of services for all property types, fully-integrated on a global basis, including leasing, sales and acquisitions, debt and equity financing, investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $5.5 billion in assets under management through its wholly-owned subsidiary Cushman & Wakefield Investors.  A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge. In China, Cushman & Wakefield maintains six market-leading offices in Beijing, Shanghai, Chengdu, Guangzhou, Shenzhen and Hong Kong. More information is available at www.cushmanwakefield.com.

(Figure 1)

Tenants of large area to be vacated in the first half of 2012 in Greater Central

(Figure 2)

2011 to 2012 main hotel and service apartments' transactions