At its annual media luncheon Savills predicted that the property markets in Hong Kong were set to experience a subdued 2019 in the shadow of continuing interest rate hikes, a shaky stock market, dampened sentiment and uncertainty on the global macroeconomic level.
One of the few sure things in Hong Kong property is its inability to reveal clear, sure patterns when external and internal factors are taken into consideration. It’s the reason that 2018 was a bit surprising on some fronts. Our forecast for last year was a cautious one, with most asset classes predicted to gain a modest 5% (or lose 5% for offices overall, warehouses and shopping malls) in rents. The real numbers, amazingly, were much better: office rents rose 8 to 10%; luxury residential rents grew 8 to 10%; retail looked to turn a corner and gained 2 to 4% in 2018; and flatted factories and warehouses shone, with rents in both gaining 8% for the year. Sales figures performed largely as expected — up 5 to 12% depending on the asset — with the exception of prime street shops, which were off 3%. Again, industrial properties carried the day.
The figures for 2019 are unlikely to involve the pleasant surprises of last year. For the coming frame we expect the office sector to gain 2.5 to 5% in rents, with flat pricing in Central and down as much as 5% overall; luxury residential apartments and townhouses are poised to gain 5 to 10%, but will lose up to 10% in value; shopping centres and prime street shops should both hold steady at 2% gains on the rental front, but street shops will get dinged again, losing 5% on prices; and industrial rents (flatted factories and warehouses) are set climb 2 to 5% in rents and 5% in prices, making the sector the property star for the second year running. Here’s why.
Last year was what had become a typical one in Hong Kong markets. The PRC was buoying rentals and sales in the Central office sector, decentralisation was a trend propping up other districts in the city and showing no signs of waning, there was restricted supply in the residential market and interest rates remained at 10-year lows. Even the retail sector looked to be perking up after nearly five years of slippage.
The landscape in 2019 is going to be markedly different. At the top of the list of influencing factors are rising interest rates. Prime and HIBOR rates started rising in September 2018 — the first of a probable three to four over 12 to 18 months — and have already impacted the mass market in terms of both sentiment and prices. Real interest rates will take a turn into positive territory this year, and as such there’s a wait-and-see attitude creeping into the market, particularly in the luxury sector, though luxury residential is slightly more insulated by a lack of new supply that will buoy values.
A slowing Chinese economy will be felt in the commercial market to a degree. With PRC firms the bloodline of the Grade A office market in Central, an economic slide could trickle down to rents and values, though with no significant new supply on Hong Kong Island expected this year (two million square feet are listed for Kowloon) investors are turning to value added assets, and with skyrocketing prices finally cooling off many may consider a return to the market, chiefly funds and UHNWI looking for opportunities from distressed sellers.
Also among 2019’s headwinds are the dual threats of a potentially protracted Sino-US trade war which negatively affects consumer spending and ongoing stock market volatility, both of which started to make their presence felt by autumn. The trade war will make retailers cautious in their expansion plans, but the light at the end of that tunnel is the possibility of some form of agreement on the back of the G20 summit meeting at the tail end of 2018. Also on the bright side, rents in the New Territories could see modest rises in the wake of high-speed rail and bridge connections that are fully operational. The tight connection between stocks and property means the 20% correction in the equities market (so far) could manifest in softening property prices a quarter, perhaps two from now, but that’s yet another game of wait-and-see.