HK Commercial real estate: 2021 expectations

Hong Kong commercial real estate is entering into the last stages of the two-year downcycle, light appearing at the end of the tunnel

January 19, 2021

2020 is undoubtedly one of the most traumatic years in our memories with the outbreak of COVID-19 pandemic. In its early days, people perceived it as a SARS-like event – short and acute impact but regionally contained, and followed by a sharp rebound. But the pandemic turned out to have caused extreme havoc globally, and is continuing even today. Economies big or small were stalled for extended periods. Some industries reached the brink of being wiped out.

For the real estate market, facing low economic activities and bleak prospects, it is not surprising to see user demand dwindling across most sectors. Most companies have adopted a cost-saving mode, whether out of caution or dire financial strains. Cutting real estate expenses was one of the many ways to sustain or survive.

As we enter into 2021, there appears light at the end of the tunnel with the prospects of vaccination roll-out, and a subsequent return to normalcy.

In Hong Kong, commercial real estate had run into a downturn even before the pandemic hit. By now, the sharpest phase of correction is well behind us, though an imminent turnaround may still be elusive. Nevertheless, be it for leasing or investment purposes, it is not far-fetched to expect real activities to rise from the deeply depressed levels in 2020. 

What do we expect for Hong Kong commercial real estate in 2021?

Depending on when travel will resume, the retail sector will likely be the first to witness a rebound. After all, with inbound tourism effectively non-existent in 2020, even a modest return of tourist spending in Hong Kong will translate into visible growth. As high street rents in core commercial locations have corrected to almost the 2003 level, more retailers are willing to test the water with tentative commitments. With further momentum, retail rents are likely to tread on the positive side.

Momentum is more apparent in the investment market. The number of retail property transactions rose 42% in 2H20, compared to the first half of the year. Although dominated by small lump-sum deals, it is a sign that local pundits are already positioning to front-run this potential turnaround.

Figure 1: Retail Investment Transaction

Source: EPRC, JLL Research

The office sector, on the other hand, may take a little longer to gather strength. Effects of the adverse events in 2020 are likely to linger into 2021. Corporate sentiment will be cautious at best, initially. A considerable amount of vacant and surrender space will continue to be the sources of rental pressure. However, as the broader economy stabilises, we expect corporates to proactively engage in growth strategy in the Greater China region. After all, China is arguably the world’s only major economy that has firmly embarked on a growth path.

Figure 2: Real GDP and Grade A Office Rental Growth

Source: JLL Research