Leading diversified professional services and investment management company Colliers (NASDAQ and TSX: CIGI) has released its Colliers Market Report | Q2 2024, revealing a mixed and modest sentiment across commercial real estate sectors while macroeconomic uncertainty prevails. The report forecasted a resilient high-street retail asset with rents nudging upwards, yet Grade A office and warehouse rents are set to decline further, given a high vacancy rate and a tepid market condition. On the investment front, we expect a continued uptick in distressed sales while the likelihood of a comeback in transaction volume is subject to any potential rate cuts in the subsequent months.

“In Q2, the Hong Kong’s property market observed divergent trends across sectors against prevailing challenges such as the delay in interest rate cuts, the trends in outbound and cross-border travel and a general conservative sentiment towards business outlook. Cost-consciousness among tenants has limited the chance of expansion and thereby exerting pressure on rents. Retail market was polarised with tenants leveraging an affordable rent to expand or relocate to first-tier locations. The real estate investment market continues to show signs of caution in Q2, with distressed assets taking the lead in transactions, “said Kathy Lee, Head of Research at Colliers Hong Kong.

Office

The overall Grade A office rent recorded a decline of 1.0% QoQ to HKD51 per sq. ft., driven mainly by a high vacancy rate at 16.6%, translating into a total office vacant area of 13.8 million sq. ft. NFA in Q2 2024, setting a record high by surpassing the previous peak in Q1 2024 by an additional 0.4 million sq. ft. Submarkets like Island East experienced a most significant drop (-2.4% QoQ and -5.0% YTD) in rental level, followed by Central/Admiralty witnessing a correction of -1.2% QoQ to HKD89.6 per sq. ft.. 

As revealed from our Hong Kong Occupier Survey 2024 released in end of June, majority of the tenants prioritised cost savings and optimisation in view of a more conservative sentiment towards business outlook, thereby limiting the market demand. Colliers anticipate a decline of 7% this year in the Grade A office rents. “The latest trends in leasing activity, as highlighted in our Occupier Survey 2024, indicate a domination of renewals over expansions. Meanwhile, existing tenants in Central are displaying loyalty to the district, leading to flight-to-quality opportunities for upcoming supply including The Henderson and Cheung Kong Center II,” said Fiona Ngan, Head of Occupier Services at Colliers Hong Kong.

Retail

The high-street retail markets benefitted from the continued recovery in tourism, registering steady growth by 1.0% QoQ in rents. The resilience has been most evident in Causeway Bay where it recorded a 1.8% QoQ increase in rents, outperforming other districts. Yet, domestic spending has declined due to an increase in outbound and cross-border travel, marked by a 6.1% YoY drop in retail sales over the first five months of 2024, affecting the performance of neighbourhood and regional malls.

There are high-end retail brands leveraging the currently affordable rents to expand or relocate to first-tier locations, driving up demand for high streets in core districts as well as Grade A shopping malls. “With the ongoing leasing trends, we see the high-street retail segment outperform non-core markets in coming quarters. We believe that the increased duty-free allowance for mainland residents effective in August is likely to benefit retail sentiment, with high-street shop rents edging up by but not more than 10% in 2024, ” said Cynthia H Ng, Head of Retail Services at Colliers Hong Kong.

Industrial

The warehouse leasing market is facing a dual challenge of slowing demand and increasing availability, leading to a rental drop of 0.4% QoQ in Q2 2024. Majority of tenants, third-party logistics (3PLs) companies in particular, adopted a conservative attitude with renewals dominating the leasing activity in Q2.

“The industrial market is navigating a complex environment as a labour shortage is driving occupiers to upgrade to more efficient and more conveniently located purpose-built warehouses. Meanwhile, the resumption of ongoing brownfield land redevelopment in the Northern Metropolis will drive new leasing activity through relocation requirements. Overall warehouse rents is set to drop by 5%,” said Fiona Ngan, Head of Occupier Services at Colliers Hong Kong.

Investment

The overall investment market remained subdued in Q2, with volume edging down by 4.6% QoQ to HKD5.3 billion, despite an uptick in the number of big-ticket deals^* by 175% QoQ. Distressed or capital loss sales dominated 50% (11 deals) of the big-ticket deals in Q2, recording a capital loss of as high as 60% in certain deals as compared with the purchase price in 2017–18.

“Moving forward to H2, we expect sellers to become more realistic while more distressed sales will take place, potentially pushing 2024’s total volume to HKD30 billion, with the forecast for transaction volume in H2 edging up to HKD20 billion. Other than cash-rich investors, family offices and credit funds are actively looking for new investment opportunities yielding at least 5%, paving way for more complex transactions in H2,” said Thomas Chak, Co-Head of Capital Markets & Investment Services at Colliers Hong Kong.

*Deal size HKD100 million or above, excluding residential sites and luxury residential premises

For further information, please contact Kathy Lee, Head of Research Colliers Hong Kong, Fiona Ngan, Head of Occupier Services Colliers Hong Kong, Cynthia H Ng, Head of Retail Services Colliers Hong Kong and Thomas Chak, Co-Head of Capital Markets & Investment Services Colliers Hong Kong as the details below.

Down load Colliers Market Report | Q2 2024 here.