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Mainland Visitors Return to Hong Kong as High Street Rents Bottom Out

Rosanna Tang • 12/04/2023

Border Opening Boosts Office Leasing Activities, Although Net Absorption Yet to See Immediate Rebound

  • Retail sales rose 17.3% y-o-y in the first two months of 2023, as the mainland China-Hong Kong border opening supported the gradual recovery of the retail market, while visitor arrivals rebounded notably
  • High street rental declines bottomed out and vacancy rates dropped during the quarter, yet staffing shortages are limiting retailer expansion
  • Q1 overall net absorption of Grade A office space remained negative at -248,000 square feet; rents fell 1.5% q-o-q
Global real estate services firm Cushman & Wakefield today published its Hong Kong Office and Retail Leasing Markets Review and Outlook Q1 2023 report. The mainland China-Hong Kong border opening has stimulated a rebound in retail market sentiment, with total retail sales in the first two months of the year (Jan-Feb) recorded at HK$69.3 billion, up 17.3% y-o-y. The return of mainland visitors to Hong Kong has lent support to retail rent recovery during the quarter. On the other hand, the Q1 Grade A office net absorption figure remained in the negative zone, lifting the overall availability rate to 17.1% and further exerting pressure on office rents with a drop of 1.5% q-o-q. 
Office Market
With the full border opening in February 2023, normal business activities in Hong Kong gradually resumed. However, the overall performance of the Grade A office market did not see an immediate rebound in Q1, on the back of the traditional slow season of the Lunar New Year. In terms of net absorption, Q1 overall net absorption recorded negative 248,000 square feet. Amid the uncertainty in the global economic outlook, enterprises remained focusing on cost-saving strategies, with little expansion demand observed. The overall availability rate climbed to 17.1%, which further pressed rents to fall by 1.5% q-o-q and 7.9% y-o-y. Submarket-wise, rental declines were more notable in Hong Kong East and Kowloon East, with both down by more than 2% q-o-q.
John Siu, Managing Director, Head of Project and Occupier Services, Hong Kong, Cushman & Wakefield stated: "Hong Kong's full border opening in February allowed corporate decision makers to visit Hong Kong for inspection activities and expedite their decisions such as expansion, downsizing, relocation or renewal. The past few weeks have also seen a gradual pick-up in office enquiries and viewings. However, it will take time for these activities to translate into actual leasing transactions, and therefore will not be immediately reflected in the net absorption and leasing performance in the first quarter. In addition, despite the positive news from the border opening, availability rates are still at high levels, making it difficult for landlords to raise rents. We forecast the overall Grade A office rental level to fall in the range of -2% to -4% for the full year in 2023.”
“In terms of new leasing transactions by industry, banking and finance (33.3%) continued to account for the largest share of new leases, followed by the professional services (14.8%) sectors and the medical/health/beauty sector (13.5%). By submarket, Kowloon East and Central accounted for more than 30% and 20% of transactions, respectively, including some large-floor leasing deals,” John Siu further stated. "In Q1, some companies moved out of the traditional CBD to non-core submarkets to save costs, while the market also observed some relocations of medical/health/beauty sector tenants. Looking ahead, potential demand from mainland companies is expected to drive the recovery in office leasing activity. Nearly 2 million square feet of new Grade A office supply will be completed in the second half of the year, and pre-leased space from this new supply will bring positive net absorption to the market. We forecast the full-year net absorption figure to reach around 400,000 square feet," he concluded.
Retail Market
With the full border opening between Hong Kong and the mainland in February, the return of mainland visitors boosted the recovery of Hong Kong's retail market. In the first two months of 2023, total retail sales amounted to HK$69.3 billion, recording a significant increase of 17.3% y-o-y, predominately due to the low base recorded in 2022. Merchandise-related retail sectors that have enjoyed sustained popularity among mainland visitors, such as Jewellery & Watches, Fashion & Accessories, and Medicines & Cosmetics, demonstrated the most impressive y-o-y growth, up 62.6%, 46.4% and 22.4% respectively. As for high street store occupancy, vacancy rates generally declined across all key submarkets. The vacancy rate in Mongkok dropped 1.8 percentage points q-o-q to 10.9%, while that in Central dropped 1.4 percentage points to 9.9%, Tsimshatsui dropped 1.2 percentage points to 15.5%, and Causeway Bay remained at 7.9%.
With the return of international and mainland China visitors to Hong Kong, retail market sentiment rebounded, and landlords have been standing firmer on their asking rents. As a result, high street rents in the core districts have now ended the downcycle seen since the pandemic, with all districts recording low single-digit rental growth over the quarter (Chart 5). Among them, rents in Central, supported mainly by local white-collar consumers and high-end tourists, rose by 3.2% q-o-q, followed by Mongkok at 2.8% q-o-q and Causeway Bay at 2.4% q-o-q. F&B sector rents continued to rise in the range between 2.4% to 3.2% q-o-q among different submarkets.
Kevin Lam, Executive Director, Head of Retail Services, Agency & Management, Hong Kong, Cushman & Wakefield stated, “Following the full border opening between Hong Kong and the mainland, tourist arrivals show a significant increase. According to the latest government data, the city saw visitor arrivals of more than 1.46 million in February. Monthly visitor arrivals exceeded a million for the first time in three years, with mainland tourist arrivals alone exceeding 1.1 million. As a result, demand for retail stores has improved, and we believe that the first half of the year will see a faster-than-expected rental increase at about 3-8%. With the return of mainland visitors, landlords are targeting higher asking rentals. However, retailers remained generally conservative, and consequently the market did not witness major brand expansion activity during the quarter. Luxury brands and large chain-stores, in particular, will need some time to understand the changing consumption patterns of mainland visitors, after a long period of tourism hiatus. The gap in expectations between landlords and potential tenants has lengthened lease negotiations, meaning lease activities and rentals were yet to achieve an immediate V-shape rebound in Q1. In addition, after three years of border closure, Hong Kong's service sector is struggling with labor shortages, which could impede F&B expansion and the city’s tourism rebound. We believe that the first half of this year will be a period of adaptation and exploration for the retail market, with a more significant rebound and expansion activities expected to emerge in the second half of the year.”
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 52,000 employees in over 400 offices and 60 countries. In Greater China, a network of 23 offices serves local markets across the region, earning recognition and winning multiple awards for industry-leading performance. In 2022, the firm had revenue of $10.1 billion across core services including valuation, consulting, project & development services, capital markets, project & occupier services, industrial & logistics, retail and others. To learn more, visit or follow us on LinkedIn

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