Office market – suffering from the fallout of the financial crisis

As Hong Kong 's banking and finance hub, the Central office market continued to bear the brunt of downward pressure on rents of prime office space amid the weak economic environment. The rental decline in Central was the most pronounced in the first quarter, falling some 20.1% to average HK$84.06 psf. Rents in the other main districts continued to fall as well, albeit at slower rates of decline. Compared to other office districts, rents held relatively firm in Hong Kong East, down only 3.3% to average $34.93 psf, due to low vacancy.

Average rent for Grade A Office in Q1 2009

The overall trend of decentralisation and space reduction continued over the first quarter, with vacancy increasing slightly in Central to average 5.4%. Sheung Wan witnessed the greatest increase in vacancy, rising from 5.8% in the fourth quarter of 2008 to 9.5% in the first quarter of 2009, mainly due to substantial increases in vacancy in buildings such as Shun Tak Centre, China Merhants Tower and Vicwood Plaza .

Vacancy rate for Grade A Office in Q1 2009

As companies continued to decentralise their operations and take up space in lower cost areas such as Kowloon East, vacancy in the district fell slightly over the quarter to average 32.1%. However, with the continued oversupply of new offices in the area and the slower take-up rate amidst the weak economic outlook, rents continued on a downtrend to average $15.43 psf. In Tsim Sha Tsui, Grade A office rents fell 13.6% over the first quarter to average HK$34.48 psf. Landlords were more flexible in providing rental incentives such as longer rent free periods in order to retain and attract tenants to their portfolios.

Office take-up is expected to remain low for the remainder of the year. More space will be returned to the market as companies cut back on space requirements or cease operations altogether. As vacancy rates rise, average rent in Central is expected to fall a further 20% from current levels.

Residential market – pent-up demand released which drive sales and prices

Improved sentiment in the primary market was kicked off by the Cullinan as more than 300 units were sold in a single month, absorbing the purchasing power of more than HK$6 billion, and which helped lead a rebound in the luxury residential sales market. Both prices and volume recovered significantly in the first quarter of 2009, especially from March. The average price of luxury residential properties on Hong Kong Island increased 9.3% q-o-q. Nonetheless, prices were still discounted compared to 2008, as they returned to mid-2007 levels. On a y-o-y basis, the overall average price of luxury residential property on Hong Kong Island decreased 27.3%.

Average price for luxury residential properties in Q1 2009

Although rents in the luxury residential leasing market were still under pressure in the first quarter of 2009, the rate of decline stabilised. The average rental for luxury residential properties on Hong Kong Island softened merely 2.8% q-o-q, compared to last quarter's drop of around 20%. The largest rental decrease was recorded in the Mid-Levels at 4.6% q-o-q. Mid-levels is a popular district for younger overseas professionals working in the Central district. With the downturn in the financial industry and recent layoffs, many of these individuals have relocated to less expensive areas or returned home, and vacancy has risen as a result.

The Peak rentals dropped the least, nudging down less than 1%. The supply of rental properties is lower on the Peak compared to other districts, helping to soften any rental decline. Also tenants living on the Peak are less likely to be affected by the current economic downturn.

Average rent for luxury residential properties in Q1 2009

With improved sentiment overall and the release of pent-up buying demand, luxury residential sales transactions began to pick up towards the end of the quarter. This potentially signals a renewed confidence in the long-term prospects of Hong Kong 's luxury residential market. The overall rental yield of luxury residential properties on Hong Kong Island dropped slightly to 3.48% as capital values improved. As interest rates are expected to remain at low levels this year, luxury residential yields should remain attractive to potential investors.

Retail market – improved local sentiment and China tourist factor save demand in prime areas

Retail rents held firm over the first quarter of 2009, registering a mild increase of 0.4%. This is an improvement from the 8.7% decline recorded in the fourth quarter of last year. Rents in parts of Causeway Bay dropped, pulling the average down 0.3% over the quarter. However, strong rental growth for a property along Wellington Street helped push up average rents in Central by 1.7%. The yield for retail space increased 5 basis points over the quarter to 4.8%.

While some retailers were noted to be scaling back operations in Hong Kong in favour of mainland expansion, others such as mass market F&B chains were looking for new opportunities. Despite the difficult economic environment, prime shop space remained in demand.

Industrial market – bad trade figures heighten concerns

Demand for industrial space in Hong Kong has weakened largely due to the reduction in cargo movement volumes and subdued demand for both retail and industrial goods. The warehouse sector was negatively impacted with rents declining around 8% over the quarter to average HK$5.87 psf. Sales prices also continued on a downtrend, falling 2.78% to average HK$971 psf. The industrial / office market remained quiet during the period, as rental levels for these properties approximated those for new Grade A offices completed in areas such as Kowloon East. Rents for industrial / office properties fell over the first three months of the year to average HK$9.38 psf. Prices meanwhile fell 5.13% to average HK$2,544 psf. As for factories, this sector also suffered from the drop in domestic export demand and local business closures. Rent in this category fell over the quarter to average HK$6.56 psf, and prices averaged HK$1,268 psf., largely unchanged from year end 2008.

The short-term outlook for the industrial property sector remains subdued due to the slump in external demand, industrial / office properties in areas of over supply are likely to come under the most pressure in terms of rental and sale prices. The warehousing sector is expected to remain active as tenants seek to lower occupancy costs through lease restructuring and relocation to smaller, cheaper premises.