According to international property consultant Knight Frank’s research, with the fear of a double-dip recession in the US economy as well as volatility in the global stock market, the sentiment in both the office and residential sales markets weakened over the past month. Homes sales in July dropped over 40% from the previous month, the largest month-on-month decline since May 2009. Meanwhile, office sales fell about 30% from June and reached the lowest level since January this year. In contrast to the sales market, residential and office rental markets remained active. Residential rents rose 0.6% month on month, while rents in over half of the major business districts in Hong Kong had reached levels well above their 2008 peaks, including Quarry Bay, Wan Chai, Causeway Bay and Kowloon East. Rents in Central were about 2.3% below their 2008 peak, while those in Admiralty were also very close to their previous high.
Residential market
At the beginning of August, the lowering of the US’ credit rating by Standard & Poor’s and the European sovereign debt crisis were in the spotlight. Investors feared a global economic downturn, causing a worldwide crash in stock markets. However, such unrest is not expected to severely affect Hong Kong’s residential property market. Previous experiences show that Hong Kong’s residential market only witnessed substantial corrections when prices became unaffordable, interest rates were rising and supply was excessive.
The purchasing power of potential buyers and the holding power of flat owners are expected to remain strong in a healthy economy. Mortgage rates—though slightly higher than before—are still low and would remain at such levels for at least two more years. Supply of residential units, which is expected to average 15,300 per year from 2011 to 2017, will likely to fall short of demand given that take-up over the past 20 years averaged 19,500 units per year.
Unless further unfavourable news that seriously affects the global and local economy emerges, we believe property prices would remain stable, although transaction volumes may decrease. Meanwhile, residential rents should also remain steady or drop only slightly when more landlords put properties up for lease amid weak market sentiment in the sales sector.
Office Market
Sentiment in the office sales market weakened over the past month. The slowdown was triggered by a number of factors, including buyers' resistance to Grade-A office prices that had surged 23.7% over the past seven months, the fear of a double-dip recession in the US economy as well as volatility in the global stock market.
In contrast to the sales market, the Grade-A office rental market saw transaction volume pick up last month, thanks to sustained demand and stabilising rental growth. Relocation activity was robust: an international insurance firm moved from Central to three floors totaling 52,800 sq ft in Times Square Tower One, Causeway Bay, while Intel relocated from Admiralty to a whole floor measuring 21,000 sq ft in Central Plaza, Wan Chai. The market also saw expansion activity during the month. An example involved international auction house Sotheby's absorption of an additional office floor in One Pacific Place in Admiralty, totaling 16,800 sq ft.
As the world economic outlook turns uncertain, we believe the pace of local office rental growth could slow in the rest of the year, especially as rents had soared 21.9% over the previous seven months. We have revised down our previous forecast and expect Grade-A office rents in Hong Kong to grow about 25% over 2011.