Hong Kong's commercial and residential markets continued to  consolidate in 2024 amid high vacancy rates and weak economy. However, the removal of cooling measures  in the housing market and the recent rate cuts have boosted market activity.  

Cathie Chung, Senior Director of Research at JLL, said: "In 2025, the market will still face oversupply  issues and economic uncertainties. The economic and interest rate policies under the new US administration  will significantly impact the housing and property investment markets. The office leasing market is expected  to gradually improve, with a significant reduction in new office supply anticipated from 2027." 

Key points:  

• Share of demand for office spaces 50,000 sq ft or above has rebounded to the highest level since  2019.  
• Overall rents for Grade A offices are expected to decline by 5-10% in 2025.  
• Retail leasing activity is polarised, with strong demand in first-tier streets in prime shopping districts,  while lower tier streets struggle to attract tenants.  
• Retail rents are projected to decrease 0-5% in 2025 after two years of recovery. 
• Uncertainties over the new US administration's economic and interest rate policies has led local investors to adopt a wait-and-see approach to commercial property investments. 
• Capital values across the three commercial sectors are expected to drop 5-10% in 2025. 
• 2024 marked a pivotal year for the housing market, with the removal of cooling measures and falling  rates, yet home prices still dropped by 6.8%.  
• Prices for mass and luxury residential properties are expected to decline by about 5% in 2025.  
• The government should simplify land sales conditions and divide sites into smaller parcels to attract more developers to participate in land bidding.  
• It is time to review the URA's Home Purchase Allowance for owner-occupied domestic properties to enhance the attractiveness of redevelopment projects during downturns.  

Office Market 

In 2024, the overall vacancy rate for Grade A office space rose to 13.1%, marking a historically high level in  25 years, primarily due to the new completions in Central and other districts. Despite this increase, vacancy  situation of four out of the five major business districts remained stable, with three showing signs of  improvement.  

Market-wide rents declined by 8.6%, with Central experiencing a 12.0% drop due to intensified competitions from new supply in the district.  

Leasing activities saw some improvements this year, particularly in the second half. This resulted in 1.1  million sq ft of positive net absorption over the past 11 months, surpassing the historical 10-year annual  average of 670,000 sq ft. 

The finance, insurance, real estate, professional and business services (FIREBS) sectors remain the most  active tenants, accounting for the largest share of new lettings and expansions at 61.7%.  

We observed that tenants’ size requirements have increased. While there remains approximately 28% of new  lettings were for office spaces under 5,000 sq ft, reflecting tenants' cost-consciousness, about 33% of new  lettings in 2024 were for spaces exceeding 20,000 sq ft, nearing the pre-pandemic level in 2019.

In particular,  17% of new lettings were 50,000 sq ft or above, the highest level since 2019. This trend is primarily driven by  large corporates' consolidation activities and evolving workplace needs.

Sam Gourlay, Head of Office Leasing Advisory, Hong Kong Island at JLL, said: "Developers and  landlords should consider the changing size requirements of businesses and provide larger, more flexible  floor plate sizes. New projects with larger floor plates will attract tenants’ interest." 

"Looking ahead to 2025, we anticipate continued improvement in leasing volume, with more sizable  transactions expected to conclude within the year. Demand will be primarily led by insurance, financial  trading and asset management sectors.

However, overall rents are projected to decline by 5-10% in 2025 due to weak economic conditions and substantial supply. Landlords will still need to offer incentives to attract  and retain tenants amid a high-vacancy market," he added.  

Nearly four million sq ft of new private office supply is expected to enter the market next year, further driving  up vacancy rates. However, the current oversupply situation is projected to improve in the coming years.

A  significant reduction in new office supply is anticipated from 2027 onwards, with less than 1.5 million sq ft of  confirmed supply to be completed in 2027 and 2028 combined. 

Retail Market 

The recovery of the retail market has been hindered by a decline in domestic consumption, driven by strong  northbound/outbound travel induced by the relative strength of Hong Kong currency, as well as a decrease in per capita tourist spending this year.

Rental values of High Street shops increased by only 1.3% in 2024, a  significant slowdown compared to the 14.8% growth recorded last year. Meanwhile, rental values for Prime  shopping centres decreased by 2.3% during the year.  

Leasing momentum has become polarised, with leasing activity sustained in top tier shopping streets while  lower tier streets struggle to attract tenants despite highly negotiable rents. By the end of this year, the  vacancy rate of High Street shops slightly decreased from 11.6% from last year-end to 10.5%, whereas the vacancy rate of Prime shopping centres stood at 8.9%.  

Despite these challenges, Hong Kong's relatively higher average salaries compared to neighbouring cities  continue to attract new non-local brands aiming to target customers with higher spending power.

The total  number of operators debuting in the city increased by 41.8% y-o-y. Mainland brands, accounting for about  32% of the total newcomers, surpassed Japanese operators (28%) to become the most active group entering the market for the second consecutive year.  

Jeanette Chan, Senior Director of Retail at JLL in Hong Kong, said: "Leasing demand is expected to remain active in 2025. We anticipate that retailers will target prime locations at relatively lower rental rates  and aim to secure favourable lease terms.

Given the current bottleneck in retail sales, the foreseeable  expansion in online sales, and the existing abundant availability of new prime shopping centres, the market  will face increased downward pressure. Consequently, rents of High Street shops and Prime shopping  centres are projected to decline by 0-5% in 2025.

"More landlords are likely to adopt flexible leasing strategies to attract and retain high-quality tenants. These  strategies may include extending rent-free periods beyond the typical 1-2 months, increasing capital  expenditure allowances, offering turnover rent arrangements, and providing customised incentives.

With the  abundant availability of new retail space, it is crucial for landlords to strategically manage tenancies and seek  suitable tenants to boost occupancy rates." she added.  

Capital Market 

The rate cut cycle that began in September sparked notable improvements in investment sentiment during  3Q24, leading to a mild rebound in investment volume across the office and industrial sectors. However,  heightened uncertainties in the macroeconomic landscape following the US election prompted investors to  adopt a cautious, wait-and-see approach in 4Q24.

This shift in investor behaviour resulted in a renewed decline in investment volume. Commercial properties sold for HKD 50 million or more totalled HKD 13.7  billion in 2H24, marking a 2.9% decrease from 1H24.  

In the backdrop of elevated interest rates and a softened rental outlook, capital values across all major  commercial sectors declined in 2024. Capital values of overall Grade A offices decreased by 9.8%. High  Street shops saw a retreat in capital values by 1.6%, while prime warehouses experienced a decline of 7.4%. 

Oscar Chan, Head of Capital Markets at JLL in Hong Kong, said: "The Policy Address 2024 introduced  the forthcoming relaxation on converting hotels and other commercial buildings into student hostels.  Following the pilot scheme launch, Grade B offices may emerge as highly sought-after assets alongside  hotels.

We recommend that the government offer guidelines to delineate student housing operators, assisting  banks in loan assessments. The provision of clear procedures and incentives for transforming Grade B  offices, encompassing zoning and licensing prerequisites as well as providing waivers for such conversions,  is also strongly encouraged."  

"Looking ahead, we expect the pace of rate cuts to be slower, potentially prolonging the property downturn. A  rise in distressed properties listings is probable next year, as numerous owners continue to grapple with  refinancing high-interest loans.

Capital values across the three commercial sectors are expected to drop by  5-10% in 2025, presenting advantageous investment prospects for opportunistic buyers." he said.  

Residential Market 

The year 2024 marked a pivotal moment for the housing market, with the removal of all cooling measures,  the relaxation of the maximum loan-to-value (LTV) ratio by the HKMA, and interest rates cuts.

These actions  boosted home sales by 22.2% y-o-y in the first 11 months of 2024 but failed to prevent housing prices from  dropping a further 6.8% due to ongoing uncertainties and abundant supply.  

The new private residential inventory is expected to reach a more balanced supply and demand level by the  end of 2025. However, the number of unsold units of completed projects remained at a historic high of 20,700 in September, and interest rates remain elevated.

Developers are facing high financial costs, forcing them to maintain aggressive pricing strategies to ensure steady sales velocity. Prices of new projects are  expected to fall next year.  

The interest rate trend for 2025 is anticipated to be less favourable than expected. Based on our data from  the previous three rate cut cycles, housing prices typically do not rebound significantly in the early stages of  rate cuts but only when rates approach zero.

Additionally, the HIBOR remains above 4%, higher than the  level seen during a housing market recovery.  

Joseph Tsang, Chairman of JLL in Hong Kong, said: "In 2025, the primary challenge in the housing  market is oversupply. However, we must also consider the risks posed by the escalating US-China trade war and an uncertain interest rate outlook, which could impact the housing market.

The decline in home prices  since 2021 is not just a cyclical adjustment. While cyclical factors such as interest rates, economic  conditions, and supply-demand cycles can only partially explain the drop, deep structural changes are  reshaping market fundamentals and asset values.

We expect the prices of mass and luxury residential properties will drop by about 5% next year, while housing rents will rise by 0-5%." 

He added, "However, if the influx of mainland Chinese capital exceeds expectations due to anticipated RMB  depreciation, the decline in home prices could be more moderate." 

Land Market 

While land supply remains important, the government must prioritise urgent needs within its limited fiscal  budget, such as improving infrastructure and promoting the transition to an innovative and technological  economy.  

Alkan Au, Head of Valuation Advisory at JLL, suggested: "Developers are reluctant to acquire land due to the weak residential sales market and high investment costs. Land prices continue to face downward  pressure.

To enhance revenue from land sales, the government should focus on improving the investment  environment for developers. We have three key recommendations to achieve this goal." 

For public land sales, the government could consider the following measures during the downturn: 

1. Attach fewer supplementary conditions to land sales 

• Attach fewer requirements. For example, provision of Government, Institution or Community (GIC) facilities, and road works, etc. 
• Additional conditions such as ESG & GIC facilities, aboveground carpark should be exempted from maximum GFA allowed. 
• Remove the conditions of requiring developers to return portion of GFA to the Government upon completion e.g. recent sites in Yuen Long and Tuen Mun. 

2. Reduce the site area into smaller land parcels for each sale 

• Consider staged payment of land premium for large-scale development sites, as large sites will reduce the incentive of developers due to longer development and payback periods.
• Breaking down the land into smaller parcels can increase developers' interest and the likelihood of successful bids, requiring a lower initial investment for consideration. 

The tender of URA's redevelopment projects is another key source of land supply. To streamline land  allocation, the government should review the URA's Home Purchase Allowance for owner-occupied  residential properties and adjust the assessment base from the value of a 7-year-old flat to that of a 10-year-old or older flat.

This adjustment would reflect the drop in housing prices, potentially lowering acquisition  costs and enhancing project profitability in a downturn market. This can help ensure the continuity and  progress of urban revitalisation. 

"Given the high investment costs and lack of profitability, developers are losing interest in building Home  Ownership Scheme flats.

The government could explore the option of repurposing these sites for public  rental housing development to address the urgent need for public housing," he added.