Hong Kong real estate has faced a rising number of challenges in 2023 not least higher interest rates which have pushed a significant number of investors out of the market, and slowing economic growth which has cramped occupier demand across all major property sectors. Such negative cyclical factors have been compounded by fundamental changes to the way markets have traditionally functioned, largely as a result of technological disruption accelerated by the pandemic.

For some years now e-commerce has threatened bricks-and mortar retail and forced a shift to ‘omni-channel’ sales and marketing, a shift compounded by changes to consumer behaviour brought about by Covid. The sector has not been helped by a slower-than-expected recovery in tourism, especially from the Mainland. Further challenges have come in the form of the rising appeal of alternative destinations, including the Mainland itself.

Offices on the other hand have faced a work-from-home revolution enabled by networking software and a changing perception of the work-life balance. Even if Hong Kong has been less effected by these changes than elsewhere, negative shifts in demand have been amplified by an over supply of office space and an absence of Mainland firms entering the territory. The rising cost of ESG compliance for both tenants and landlords has also contributed to uncertainty and the threat of redundant assets.

In the residential market, rising mortgage rates and large-scale emigration have not helped demand for housing and the discounting of new launches has been in evidence. Higher numbers of professionals from the Mainland may go some way to plugging the demand gap but buying interest appears muted for now. Numbers of unsold units in the luxury markets is currently weighing on values.

Looking ahead to 2024, the Year of the Dragon typically denotes luck and prosperity, but the year may, initially at least, see further obstacles as higher interest rates persist and growth lags. Office rents over the year may fall a further 5% to 10% while prices could decline of 10% to 15% across the market as a whole with a wide variation depending on quality and location. While the retail sector will remain a shadow of its former self, we expect a rise in rents and values in the order of 0% to 5% having registered a peak to trough correction of over 60% since 2015.

The luxury residential market will continue to look vulnerable in 2024 and we expect to see falls of 15% to 20% in values at the top end, including townhouses. Higher mortgage costs and fewer Mainland buyers are already having an impact and rising numbers of foreclosure sales have been in evidence as we approach the end of 2023. Numbers of unsold houses and luxury apartments could take several years to be fully absorbed.

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