Domestic sociopolitical unrest and global economic volatility created significant turbulence in Hong Kong in 2019. Local trade, investment and consumption declined sharply following the onset of large-scale demonstrations in June, leading to a technical recession in Q3 2019. Hong Kong’s GDP contracted by 1.2% in 2019, the first full-year negative growth since 2009.

Inbound tourism weakened significantly in H2 2019 and dragged down retail sales by 20% y-o-y over the same period. Retail sales registered a decline of 11% y-o-y for full-year 2019, the sharpest fall since the Asian Financial Crisis. The job market was also affected, with the unemployment rate for the retail, hospitality and F&B trades climbing to 5.2% at year-end. Overall unemployment edged up from 2.8% to 3.3% over the same period.

Financial markets remained resilient. The aggregate balance in Hong Kong’s banking system held firm in H2 2019, with the Hang Seng Index closing the year 2,344 points higher than at end-2018.

Hong Kong’s economic outlook remains downbeat despite the U.S. and China’s Phase-One trade deal. Prolonged sociopolitical unrest will also continue to weigh on affected sectors of the economy.

The coronavirus outbreak will also impact aggregate demand, at least in H1 2020. Various political elections as well as the Legislative Council election in Hong Kong will add a further layer of complexity to Hong Kong’s economic outlook.

As corporates stay cautious, labour market conditions may deteriorate further and weigh on consumption expenditure. Momentum in the trade, retail and inbound tourism will be weak.

Interest rates are expected to stay low for longer. Combined with ample liquidity and the low-base effect, overall investment demand is forecasted to increase from 2019.

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Figure 38



Escalating global economic risks weighed on leasing demand in Hong Kong’s Grade A office market in 2019. Leasing activity softened despite the delivery of 2.3 million sq. ft. of new space. Annual net absorption registered 403,000 sq. ft., a significant decline on the 2.9 million sq. ft. recorded in 2018. Beginning in Q3 2019, corporates turned more cautious as sociopolitical unrest began to affect the business outlook, resulting in many real estate decisions being postponed. Net absorption stood at -225,000 sq. ft. in H2 2019.

The U.S.-China trade conflict, coupled with the depreciation of the RMB, prompted leasing demand from Mainland Chinese companies to decline by 36% y-o-y in 2019. Demand from co-working centres was down 63% y-o-y in 2019, with 71% of leased space (174,000 sq. ft.) signed in H1 2019. Some operators opted to surrender space in H2 2019.

The high cost of CBD space and rising availability of new supply in non-core submarkets stimulated additional decentralisation activity in 2019. Occupiers relocated a total of 731,000 sq. ft. of space away from core submarkets, the second highest annual figure since 2015.

Weaker leasing demand resulted in higher space availability in 2019. Vacancy climbed in Greater Central, rising from 1.3% at end-2018 to 3.4% at end-2019, marking the highest year-end figure since 2014. Rents in this submarket fell by 5.9% y-o-y, the sharpest annual decline since 2012. Wan Chai/Causeway Bay and Greater Tsim Sha Tsui saw rents fall by 3.3% and 0.3% y-o-y, respectively.

The decentralisation trend kept vacancy in Hong Kong East low, and helped rents increase by 6.3% y-o-y in 2019. New supply in Kowloon East resulted in vacancy remaining high at 15.1%, leading to a rental decline of 0.8% y-o-y in 2019.

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With the global, China and local economy all facing strong headwinds, office occupiers will stay cautious in 2020. However, should the coronavirus outbreak be contained by mid-year, business momentum will likely pick up in H2 2020.

Cost control will be a key theme this year. New and cost-effective offices in decentralised submarkets will be keenly sought after. Some larger occupiers may consolidate their footprint as part of a temporary adjustment amid the current downturn. However, the likelihood of significant downsizing is low unless Hong Kong’s economic outlook sours further. While coworking space operators will focus on improving occupancy, virtual banks and TMT firms may emerge as new drivers of leasing demand along with the introduction of 5G.

New supply in 2020 will fall to a 14-year low of 513,500 sq. ft.. This, combined with the 1.0 million sq. ft. of new space to be delivered in 2021, will mark the last few years of limited supply before a surge in new completions commences in 2022/2023. Most new buildings due to come on stream this year are in decentralised locations, and will therefore not impact competition in core submarkets. Occupiers with leases expiring in two to three years are expected to commence evaluating options in 2020 as they seek to take first-mover advantage of the upcoming supply boom.

Climbing vacancy and subdued market sentiment will ensure Grade A office rents soften further in 2020. Pressure will be strongest in the Central CBD, where vacancy is climbing and occupiers are reluctant to pay premium rents. Hong Kong East will continue to benefit from low vacancy and demand from occupiers moving away from Central and Wan Chai & Causeway Bay. While Kowloon East remains a preferred location for decentralisation, higher vacancy in this district will prevent rents from escalating in the short-term.

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Hong Kong’s retail market endured a tough 2019 as sociopolitical unrest impacted consumer activity. Total retail sales registered their sharpest annual decline since 1998, falling by 11.1%. Widespread demonstrations on high streets and in shopping malls across many core and non-core retail districts resulted in all major trades suffering double-digit sales declines in Q3 2019 and Q4 2019.

Over 40 countries issued travel warnings to Hong Kong in H2 2019, leading to a 39% y-o-y fall in visitor arrivals for that period. Tourist-oriented retail trades were hit hard, with watch and jewellery sales plunging by 39% y-o-y in H2 2019. Several fashion chains such as Forever 21, Jack Wills and SPAO exiting the market during H2 2019, although some of these cases were due to global restructuring.

F&B, traditionally a resilient category, also suffered in the second half of the year. Total restaurant receipts posted their first negative growth in ten years, falling 11.8% y-o-y and 14.3% y-o-y, respectively, in Q3 2019 and Q4 2019. Several chains ceased operations.

High street shop vacancy in the four core shopping districts of Central, Causeway Bay, Tsim Sha Tsui and Mong Kok climbed 2.5 percentage points from 4.1% at end-2018 to 6.6% at end-2019.

Japanese retailers and eateries remained active, with over 20 new brands making their debut in Hong Kong in 2019.

Street shop landlords turned more willing to offer rental discounts to affected retailers at protest hotspots. However, shopping centre landlords’ concessions were limited to fee waivers and pro rata rental concessions. High street shop rents in the four core shopping districts fell 19% h-o-h in H2 2019, bringing the full-year decline to 19.2%. Shopping centre rents fell by 4.4% in H2 2019 and 4.4% in full year 2019.

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The coronavirus outbreak, residual impact from sociopolitical unrest and external economic and geopolitical headwinds point to a another tough year for Hong Kong’s retail market. Consumer and retailer confidence are expected to weaken further in the absence of any tangible signs of recovery. More shop closures will be seen in H1 2020. Tourist-oriented retailers will find trading conditions especially challenging.

Pop-up stores will continue to drive leasing activity as retailers seek to limit capital expenditure and overheads. Experiential and service trades such as education centres, fitness clubs and medical clinics may take advantage of lower rents to lease space. Retailers may also use the current market downcycle as an opportunity to augment their omnichannel offering. Size requirements for shops will generally be smaller, with selected landlords already responding to this trend by subdividing larger premises to minimise vacancy risk.

New retail supply will remain limited, with 1.5 million sq. ft. scheduled for completion this year, 80% in non-core locations.

Shoring up occupancy will remain a priority for retail landlords in 2020. Rents are therefore expected to trend down further over the course of the year, although the bulk of the decline will occur in H1 2020. The average rental correction in core retail districts is predicted to be within a range of 15%-20%.

On a more positive note, CBRE believes lower rents could potentially attract more overseas retailers to Hong Kong, which retains its status as an important and lucrative international retail market. Many groups have been seeking to establish a footprint in the city for some time but have been deterred from excessive costs. The current situation may therefore provide them with a window of opportunity.

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Weaker trade activity resulting from the U.S.-China trade conflict weighed on Hong Kong’s trade and cargo freight volume in 2019. The city’s aggregate trade declined by 5.4% y-o-y in 2019, the worst performance since 2009.

Re-exports between Mainland China and the U.S. fell 13% y-o-y over the year, far below the cumulative annual growth of 2% recorded since 2009. Air and sea cargo were both down by 6.3% y-o-y over the same period.

Leasing demand from traditional industrial occupiers and freight forwarders softened in 2019, mainly due to the subdued trade market environment. Brick-and-mortar retailers also displayed a weaker appetite for warehouse space, particularly in H2 2019 when Hong Kong’s retail market was hit by sociopolitical unrest.

The tech sector was relatively active. On top of space requirements from e-commerce retailers, data centre operators leased more than 600,000 sq. ft. of industrial space in 2019, while an end-user from Mainland China bought a 196,000 sq. ft. building for redevelopment. Cold storage facilities also enjoyed solid demand. Temperature-controlled logistics operators and food-service providers leased at least 770,000 sq. ft. of space in 2019.

Acquisitions for redevelopment or revitalisation continued to reduce the availability of industrial stock for lease. A total of six en-bloc industrial buildings were sold in 2019, withdrawing a total of 700,000 sq. ft. of space from the leasing market. Combined with solid leasing demand from alternative sectors, this ensured warehouse vacancy remained low at 2.1% as of end-2019. Low vacancy resulted in accelerated rental growth of 3.6% in 2019, adding to a 2.8% gain in 2018. Growth was stronger for ramp-access buildings, which recorded an increment of 4.9% in 2019. Lift-access space registered rental growth of 0.9%.

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While the Phase-One U.S.-China trade deal has boosted prospects for trade, the outlook remains downbeat, meaning that Hong Kong’s trade sector is unlikely to record a full recovery in 2020. Other geopolitical tensions developing globally will also result in slow growth momentum and hence weak aggregate trade demand. Growth in China will continue to weaken and weigh on the country’s total exports. The coronavirus outbreak will negatively impact 3PLs catering to general trade and retailers.

Occupiers engaged in trade and retail related sectors are expected to remain cautious in 2020 and may even become a source of surrender space. However, steady demand for industrial space is expected to come from non-traditional industrial occupiers – a trend that will offset some of the vacancy risk facing landlords. The debut of 5G technology will likely generate increased demand for high-specification industrial space from technology and telecoms companies. Premises suitable for data centres will remain highly sought after.

CBRE’s expectation of limited vacancy risk also stems from demand from occupiers forced to relocate from properties that are due to be redeveloped or converted to alternative use. As of February 2020, the Town Planning Board has 39 proposed schemes under the Industrial Revitalisation Scheme 2.0, equivalent to slightly over 5.1 million sq. ft. of space that will be removed from the market.

New supply of warehouse space is expected to remain tight, with only one scheme providing 204,000 sq. ft. scheduled for completion in 2020.

Despite the grim macroeconomic outlook, low vacancy and demand from occupiers forced to relate will provide support to warehouse rents. CBRE Research expects warehouse rents to remain flat in 2020, with a single-digit decline only likely in the event of a prolonged coronavirus outbreak.

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Despite the climbing uncertainties in Hong Kong’s sociopolitical environment, investors’ confidence was largely unshaken. Aggregate balance in Hong Kong’s banking system remained steady at circa HKD 54.2 billion through H2 2019, while the Hang Seng Index climbed over 1,200 points since June.

Investment demand for commercial properties in Hong Kong, however, contracted significantly in 2019, with transaction volume falling by 52% y-o-y to HK68.6 billion. The figure was the lowest single year total since 2011 and was well below the HK$142 billion and HK$183 billion achieved in 2018 and 2017, respectively. Most transactions were registered in H1 2019, with only HK$23.2 billion worth of assets changing hands in H2 2019, making it the worst performing second half of the year since 2008.

The deteriorating investment activity was a combined result of mounting economic uncertainty, weakening occupier demand and falling rents across the major commercial property sectors. However, not all investors were cautious, with several property funds and local families continuing to seek assets. Property funds spent HK$18 billion (26% of the year’s total which marked an increment from 22% in 2018) on commercial assets over the year. Chinese capital was less active, deploying just HK$8.5 billion, accounting for 12.3% of total investment volume in 2019. This compared to an average of just below HK$30 billion, or 22% of annual transaction volume, over the past three years.

Softening rents, climbing vacancy and weaker leasing demand curbed investors’ appetite for core office assets in 2019. Office investment fell 61% y-o-y to HK$ 30 billion, although the sector still accounted for 43% of annual total transaction volume. In the retail sector, a lack of major portfolio sales meant just HK$17 billion worth of assets were sold during the year. Hotels were a sought-after asset class, with selected investors looking for properties to convert into co-living space. A total of HK$8.3 billion worth of hotel premises were transacted in 2019, a rise of 24.8% y-o-y.

Investment yields for office and industrial assets edged up marginally in 2019. Retail yields expanded by 50bps.

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Geopolitical risks and the coronavirus outbreak will weigh heavily upon the Hong Kong investment market in 2020. Various political elections will impact China’s economic and political outlook and filter through to local investment market sentiment. The low interest rate environment is expected to remain unchanged, with the U.S. Federal Reserve not anticipating any further movement in rates until next year.

Transaction volume will fall noticeably in H1 2020 and will only pick up gradually when the coronavirus outbreak fades. Should there be an improvement in economic momentum after mid-year, investment demand may see a strong rebound in H2 2020.

Weaker demand from Chinese investors continues to provide local and foreign institutional funds with a window of opportunity to acquire local assets. The low cost of funding will ensure investment yields stay at relatively low levels despite escalating economic risks. New supply and hence vacancy levels are forecast to remain within manageable levels across all commercial property sectors in 2020/2021, thereby preventing significant yield decompression.

Core office assets may see mild yield expansion in 2020 as investors react to rental adjustments but the limited availability of investible stock will keep downward pressure on capital values within a narrow range.

Interest in industrial properties is expected to remain solid. Activity will be driven mainly by value-added deals, although concerns over land-premiums for redeveloping buildings for non-polluting industrial use continue to weigh on investor appetite. The introduction of 5G technology could potentially translate into demand for properties capable of accommodating data centres. Commercial buildings suitable for medical facilities, fitness centres and education providers will also be in demand.

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