Property market ends downcycle 

Real estate expert, Cathie Chung, said that the market will have a reset by 2023.

Real estate investors may have shunned Hong Kong in the past two years, but experts’ 2023 outlook—particularly for the industrial and retail sectors—may entice them to reconsider the city as a property investment destination. The property market is poised to end its down-cycle in 2022 and enter 2023 with hopes of normalisation.

“With the gradual easing of the social distancing and travel restrictions, we would expect to see a moderate recovery across all the sectors with momentum gathering pace starting in the last quarter of this year,”  Dorothy Chow, Colliers’ executive director of Valuation & Advisory Services for Asia, told Hong Kong Business.

Investors’ eyes on industrial

Amongst sectors, Chow said the industrial sector will remain the most attractive to investors come next year.

“High yield assets have become the focus of the investors nowadays, and these would include industrial properties, logistic, and alternative assets,” said Chow.

“We expect the industrial market to have an increase in the rental and the capital levels next year,” she added.

Chow said industrial assets are popular amongst inventors because they fetch yields of 3% to 5% compared with typical offices or commercial units, which fetch less than 3% yield.

To add, Cathie Chung, senior director of research at JLL in Hong Kong, said prices of industrial assets are relatively and comparatively “on the lower side.” 

These factors are also what made the industrial sector the best-performing segment for 2022, said Chow and Chung.

Chow said transaction volumes for industrial assets doubled in the second quarter, compared with the first quarter and on a year-on-year basis. In the same period, industrial investment volume also increased by 37%, according to Chow.

“In terms of leasing and sale activities, industrial is the most active sector. Tenants are bringing demand for warehouses, and investors are looking for value-added opportunities,” said Chung.

“When investors acquire industrial properties, they convert them to a data centre or cold storage, or self-storage which also has good demand. There are repurposing opportunities for industrial properties,” she added.

Retail remains resilient

Like industrial, the retail segment showed some resilience during 2022, according to property experts.

According to Chung, the segment was supported by domestic consumption and government stimulus packages, amidst the lack of foreign visitors.

“All of us have sort of retained our expenses within the city. Therefore, the neighbourhood and discretionary retail became relatively stable,” Chung said.

Operators of food and beverage (F&B) establishments likewise took advantage of the lower rents during the pandemic and expanded, Chung added.

“We believe that the market is stabilised resilient and retailers are interested to come back when the market opportunities open come back, especially when the borders fully reopen and rents become more affordable,” JLL’s Chung said.

Chow echoed this but underscored that rising interest rates are also a worry for the market, which is why she expects the retail segment—both in terms of rental and property price—to either be stable or have a very mild increase in the next six months. 

‘Flight to quality’ lifts office market 

With many buyers hopping into a “flight-to-quality,” Chung and Chow said the office market was able to steer clear of any turbulence and remained stable in the first half of the year.

“The sector was driven by demand for premium office space as tenants are fighting for better quality and more flexible office workspace for their workers,” Chung said.

Chow said flight-to-quality means tenants are likely to pay “slightly more” for more high-quality premises.

Since premium offices are located in Central, the submarket might see some moderate growth in rentals moving forward.

“Many of the tenants who were occupying spaces in non-core areas are looking at new locations or new premises in Central. We see that trend in 2022 and we still expect that trend will continue in 2023,” Chow commented, adding that the “flight-to-quality” behaviour from tenants will also remain to be the key theme in the office market next year.

Prudently positive

With challenges like rising interest rates likely to remain in 2023, Chow said she is “prudently positive” about the market’s outlook.

Chow said the opening of the border will help the market gain a bit of recovery or an increase in transaction activities in most of the sectors in 2023.

Chung echoed this, adding that if there will be no “moving backwards in social distancing and border control measures,” 2023 will really be the year of normalisation and resetting for the commercial property market. 

A worse year for residential 

Unlike the commercial sector, Chung the residential market will face another round of price correction in 2023, due to weak domestic economic growth, population shrinkage, interest rate hikes and poor stock market performance.

In 2022, the sector also had the worst performance out of all sectors, said Chung.

Chow said the market slowed down mainly due to unexpected events at the beginning of the year, particularly, the lockdown in China.

“Buyers from the Mainland have been quite limited nowadays, in the second quarter, we still see a lot of local buyers buying into residential projects as long as the pricing has been reduced,” said Chow.

“We actually see developers reducing the asking price of the firsthand projects in Hong Kong, and that has been receiving good response,” added Chow.