Hong Kong’s commercial real estate still has a mountain to climb as office rents continue to come down amid a glut in projects coming on stream. Li Xiaoyun reports from Hong Kong.

In deep contrast to its roaring residential property market, Hong Kong’s moribund commercial real estate sector needs a bigger revitalization boost.

The latest data from property service providers show that office rents in Hong Kong are expected to drop 5 to 10 percent this year, compared with last year. The outlook for retail rents remains equally cautious, especially in residential areas with limited tourist footfall.

Despite the lower prices, the vacancy rates for office buildings and retail shops in the city remain stubbornly high, hovering above 10 percent.

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Industry experts believe that the pressures on Hong Kong’s commercial property market stem from multiple factors in both supply and demand. The special administrative region government’s efforts to lift the real estate market and the start of the interest-rate-cut cycle might bring some relief, but not an immediate effect.

The volume of office space completed in Hong Kong has gone up in recent years, but a cooling global economy has tempered investment enthusiasm, leaving a gap between supply and demand, says Kelvin Li, director of real estate agency Midland Commercial.

According to government statistics, 351,000 square meters of office space were completed in 2022 — five times the amount delivered in 2021 and nearly doubled the pre-COVID levels of 2018. Although construction activity has slowed in the past year, offices measuring about 156,000 sq m are still expected to flood the market by the end of this year.  

Cathie Chung, senior director of research at real estate services firm JLL Hong Kong, attributes the surge to the lingering effects of the real estate boom in previous years, when developers were actively buying land and launching construction projects, many of which are now nearing completion.

The Henderson — a new landmark in Central built on land acquired by Henderson Land Development in 2017 — was completed last year, offering 43,200 sq m of gross floor area, including 25 office floors. Likewise, the second phase of Cheung Kong Center, which has 270-degree view of Victoria Harbour, has also opened for leasing, providing 51,000 sq m in office area.

Although these buildings have yet to reveal their latest occupancy rate, general market sentiment suggests they are struggling against headwinds.

Besides these completed properties, a sizeable amount of office space will come on stream next year. The project atop the High-Speed Rail West Kowloon Station will deliver more than 300,000 sq m of office and retail space upon completion. The land was secured for a record-breaking price of HK$42 billion ($5.4 billion) in 2019. Moreover, One Causeway Bay is expected to be ready in the second quarter of next year, joining the fierce competition for tenants.

Who’s to blame?

The surge in supply comes as demand remains tepid. One of the most talked-about factors weighing on demand is high interest rates. The US Federal Reserve in September cut the target range for the federal funds rate by 50 basis points to between 4.75 and 5 percent after 11 rate hikes. With the Hong Kong dollar pegged to the greenback, the Hong Kong Monetary Authority — the city’s de facto central bank — followed suit swiftly with a 50-basis-point cut on its base rate, the first reduction in four years.

From 2020 until early 2022, the Federal Reserve maintained rates at a range of 0 to 0.25 percent and began aggressive hikes in March 2022 to curb inflation. In other words, “high interest rates have dampened the commercial property market only in the past two years,” Li says.

However, the bumpy decline in rents and prices of Hong Kong’s commercial properties started much earlier in 2019. Data from the city’s Rating and Valuation Department show that the average monthly rents of Grade A offices peaked at nearly HK$810 per sq m in 2019, and had dropped to HK$620 per sq m last year.

Vacancy rates tell a similar story. Office vacancies began going up in 2019 and had ballooned by nearly 80 percent in 2023.

Chung emphasizes that besides high interest rates, the global economic downturn in recent years has also stifled demand for commercial properties. When business isn’t good, companies downsize their leased spaces, relocate to more affordable buildings, or even continue with the hybrid work arrangement practiced during the COVID-19 pandemic.

The phenomenon of rising office vacancies is also seen in other international cities like London and Sydney. According to property services firm Savills, New York’s office vacancy rate is projected to soar to 28 percent this year.

The pressures on retail shops are even more complex, Li observes. Many retailers in Hong Kong are approaching new leases or purchases with caution, given factors such as intense competition in the catering sector, changing consumption habits among travelers, and the rise of cross-border shopping and e-commerce.

While everyone needs a home, offices or shops are not a necessity, making them more vulnerable to economic fluctuations. Signs of life are emerging in the housing market, with nearly 200 flats of a residential development in Sham Shui Po snapped up within hours of its launch late last month.

Bumpy path

When might the nonresidential real estate sector see a similar turnaround? Chung believes it could return to a stronger footing when the multiple factors influencing supply and demand stabilize.

In the wake of the start of the rate-cutting cycle, major banks in Hong Kong have announced better-than-expected reductions to their best lending rates, which could ease buyers’ mortgage payments and borrowing costs. “Buyers considering commercial properties as an investment option may reenter the market besides those buying for personal use,” Li says.

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Moreover, the latest Policy Address indicated that the Hong Kong Monetary Authority would relax the maximum loan to value ratio for both residential and nonresidential properties to 70 percent, and the maximum debt servicing ratio to 50 percent.

The move should “conceptually” mitigate pressures on property owners and improve market sentiment, says Chung. But she warns that this is just a guideline, which banks will put into practice based on their own commercial principles and strategies, and at least for now, there has been no significant reaction from the commercial property market.

The nonresidential property sector’s recovery could be a winding road, as the challenges it faces are caused by the interplay of multiple factors that cannot be alleviated by any single solution.

Contact the writer at irisli@chinadailyhk.com