The Hong Kong real estate market, impacted by both local and international factors, has shown promising signs of recovery in the third quarter of 2024, with the recovery of the banking and finance sectors, in particular, leading the momentum in the office and retail leasing markets.
And, with further economic stimulus from the Chinese government on the horizon and a potential rebound in tourism, the Hong Kong real estate market looks set for a gradual recovery.
For the fourth consecutive quarter, Hong Kong’s Grade A office market experienced positive net absorption, with 324,100 square feet of space absorbed in Q3, according to real estate services firm Cushman & Wakefield. This marked a significant turnaround, with the availability rate dropping to 19.3%, the lowest since Q1 2022. Key drivers behind this growth include expansion by the banking and finance sectors, which accounted for 38% of total leasing activity, followed by consumer products and professional services.
“Looking ahead,” says John Siu, Cushman’s managing director for Hong Kong, “we expect demand from the banking, finance and professional services sectors to gradually recover, if the recent stock market recovery and IPO [initial public offering] performance – which are underpinned by the interest rate cut and the macroeconomic policy stimulus from the Chinese mainland government – can sustain through the coming months.”
Despite the recovery, office rents remained under pressure, declining by 2.4% quarter on quarter, with an expected full-year rental drop between 6% and 8%, according to the real estate services firm. Landlords have responded with flexible leasing terms to attract tenants, especially as occupiers continue to seek cost-saving opportunities or upgrade to higher-quality spaces.
The retail leasing market has seen an increase in leasing activity in prime locations, with high street vacancy rates falling to a record 8%, Cushman data show, a new low level since the pandemic. Rents in major districts have experienced a pick-up of 1.0% to 2.3% quarter on quarter.
However, tourism-driven consumption remains weak, particularly affecting sectors like luxury retail. Hong Kong’s total retail sales from January to August this year dropped by 7.7% year on year to a record low of HK$249.8 billion (US$32.1 billion). The jewellery and watches, and fashion and accessories sectors have seen a double-digit decline in sales, indicating ongoing pressure on the retail leasing sector.
Yet banks and other financial institutions have capitalized on reduced high street rents, expanding their presence to attract high-net-worth clients, particularly those from mainland China. “For instance, several banks opened new wealth management centres on prime streets to capture clients from groups of high-net-worth local and mainland individuals,” Siu notes. “Several online securities brokerage platforms also expanded by setting up physical stores in core districts, seeking to raise brand awareness and gain public exposure.”
Hong Kong’s retail market is expected to benefit from economic stimulus measures and a weakening Hong Kong dollar, which could boost tourist spending. Retail rents, Cushman forecasts, will rise between 4% and 9% by the end of 2024.
The US Federal Reserve’s rate cut in September brought hope for the residential market, but it might take time. Housing prices fell by 6.2% in the first eight months of 2024, according to the Rating and Valuation Department of Hong Kong, with recent transaction volume remaining flat. Buyers tend to be cautious, waiting for further clarity on future interest rate cuts before committing to purchases.
“Most Hong Kong banks followed in the footsteps of the US Federal Reserve’s rate cut in September, sending a positive signal to the market,” shares Rosanna Tang, Cushman’s executive director and head of research for Hong Kong. “Although the residential market did not immediately rebound, the recent notable stock market rise and historical high transaction record do reflect a strengthening in investors’ confidence.”
While developers are expected to launch new projects, the overall recovery in the residential sector will depend on the broader economic landscape, including stock market performance and the pace of interest rate reductions. “We currently forecast,” notes Edgar Lai, Cushman’s senior director of valuation and consultancy services for Hong Kong, “overall residential transaction numbers to rise in a range of 15% to 20% year on year for 2024.”
The company also predicts a slight price correction of up to 5% by the end of the year, with housing market prices to enter a consolidation phase in Q4. “Meanwhile, the overall residential rental level, which has gained 6.2% in the first eight months of the year in response to the inflow of international talent and Chinese mainland students,” Tang adds, “is expected to rise in a range of 5% to 10% for the full-year 2024.”