The U.S.-China trade conflict and social unrest in Hong Kong continued to dampen real estate investment activity in Q3 2019, according to the CBRE Hong Kong Q319 MarketView report.

Investment turnover fell by 44% q-o-q to HK$12.4 billion, the lowest quarterly total recorded since Q2 2016.

Chinese buyers did not complete any acquisitions, marking the first time they have been absent from the market since Q4 2009. Domestic investors accounted for the bulk of purchasing activity.

Industrial property investment was relatively resilient but less than ten deals were completed, the lowest number since Q2 2016. However, transaction volume totalled HK$4.3 billion, an improvement of 14% q-o-q over the previous quarter.

”Geopolitical tension and social unrest will continue to negatively affect investment sentiment in the coming months.”

”Geopolitical tension and local social unrest will continue to negatively affect investment sentiment in the coming months. Some Chinese buyers consider to offload assets, particularly strata-titled properties and offices, to replenish liquidity for their main businesses while affluent local investors and institutional funds are eyeing potential distressed opportunities ahead of upcoming low office supply period. The low investment yield across all property sectors will encourage investors to seek value-added opportunities instead of core assets. En-bloc office buildings and industrial premises are expected to outperform,” said Reeves Yan, Executive Director, Capital Markets, CBRE.

CBRE Q3 2019 Highlights;

Hong Kong Grade A office Market View;

– The ongoing U.S.-China trade conflict and local sociopolitical unrest continued to weigh on leasing demand in Q3 2019. Net absorption registered just 25,400 sq. ft. while vacancy climbed 0.3% points to 6.5%.

– The weaker market sentiment ensured rents weakened across most submarkets. Overall office rents fell by 1.7% q-o-q, marking the deepest quarterly decline since Q1 2012. Greater Central was the worst performing district, with rents weakening by 2.9% q-o-q. Higher vacancy in Kowloon East also pulled down rents by 1.7% q-o-q.

– Occupiers have largely adopted a wait-and-see attitude, with many firms even delaying decisions around cost-saving initiatives including decentralisation. New commitments involving relocations to decentralised areas fell by 86% q-o-q.

– Chinese companies remained quiet. Agile space operators were relatively active, committing to 89,000 sq. ft. of additional space during the quarter.

”Hong Kong’s Grade A office leasing momentum slowed more apparently in Q3 2019. Limited sources of demand, coupled with rising availability, is set to exert downward pressure on overall rents over the next 12 months. While Tier I buildings in Central are expected to lead the rental fall, given the rental gap between non-core areas and the CBD, decentralization remains an attractive option for many occupiers. Hong Kong East particularly is expected to remain sought after by Hong Kong Island tenants who want to upgrade their office premises with lower rents. Therefore, rents in Hong Kong East will likely edge up further despite overall market sentiment,” said Alan Lok, Executive Director, Advisory & Transaction Services – Office Services, CBRE.

Hong Kong Retail Market View;

– U.S.-China trade conflict and social unrest in Hong Kong negatively impacted domestic consumption in Q3 2019. Retail sales fell by 17.2% y-o-y in July and August combined, setting Q3 to likely register the biggest quarterly drop since Q4 1998.

– Total visitor arrivals in July and August combined fell by 22.6% y-o-y, almost ensuring Q3 to experience the largest quarterly drop since the SARS outbreak in 2003.

– Although leasing activity was sluggish in Q3 2019 as more retailers become increasingly cautious towards expansion or relocation amid the ongoing protests, the period nevertheless saw some new leases signed by fashion and cosmetic retailers.

– Overall high street rents fell sharply by 10.5% q-o-q, the biggest quarterly contraction since Q1 1998. Shopping mall rents were flat. CBRE expects overall high street rents to decline by another 5-10% over the remainder of 2019.

Hong Kong Industrial Property Market View;

– Aggregate trade value fell by 8.1% y-o-y in July and August combined. Transshipments between the U.S. and China through Hong Kong weakened by 8.4% y-o-y over the same period after two consecutive quarterly declines. The contraction in airfreight accelerated to 9.8% y-o-y in July and August combined, which makes Q3 likely to encounter the sharpest fall since Q2 2009.

– Leasing momentum continued to slow in Q3 2019 as occupiers retained their wait-and-see approach. Occupiers with less exposure to domestic and international disputes, such as data centres and beverage logistics companies. continued to support leasing activity.

– Warehouse vacancy edged down slightly by 0.1% points to 1.6%, marking the fourth consecutive quarter that vacancy has been below 2.5%.

– Rents for ramp-access buildings rose by 1.2% q-o-q while those for cargo-lift access buildings increased 0.1% q-o-q. Overall warehouse rents grew by 0.8% q-o-q. As immediate vacancy will likely remain limited, warehouse rents are therefore expected to be stable for the remainder of 2019.

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