Although rates of rental decline are showing signs of slowing, the market dynamics are similar to previous quarters with an absence of new arrivals and a reliance on local demand.
- All areas of Hong Kong Island, Kowloon and the New Territories recorded more modest rental declines compared with Q4/2020.
- The end of the school year in summer will be key for expats deciding whether to either leave or stay.
- Pockets of vacancy have been observed on Hong Kong Island as tenants relocate to cheaper areas.
- Townhouse rents saw a slight rebound of 0.2% after declining for seven consecutive quarters.
- In the serviced apartment market operators are having to compete with hotel long-stay packages as well as discounts from other operators.
- PRC and overseas demand should return once travel restrictions are relaxed in the second half.
Hong Kong – 1 Apr 2021 The luxury leasing market was quiet in the first quarter, with depressed levels of business activity (over 5.3 million sq ft of vacancy in the office market) and an onerous 21 days of quarantine required by the government. Luxury apartment rents on Hong Kong Island, Kowloon and the New Territories fell by 1.2%, 1.1% and 1.7% respectively, all recording lower rates of decline compared with the previous quarter. Leasing activity has come to rely on local demand given that new arrivals have been scarce.
In the first quarter of 2021, all districts on Hong Kong Island registered smaller rates of rental decline compared with the previous quarter. Southside/Shouson Hill recorded the largest rental decline on Hong Kong Island, with rents falling by 2.0% over Q1/2021, followed by The Peak (-1.3%) and Happy Valley/Jardine's Lookout (-1.3%). Against a background of economic recession, reductions in housing allowances have driven tenants into lower-priced districts. Pockets of residential availability are opening up on Hong Kong island and inflexible landlords are paying the price with empty units.
Kowloon rents are relatively stable at the moment while the New Territories has retained its outdoor appeal. There is plenty of stock in Sai Kung, also in Tai Po where a wave of new completions is keeping rents in check and a 1,600 sq ft unit in a new block can be rented for HK$60,000 per month. Meanwhile airline pilots continue to relocate off Hong Kong island to Discovery Bay on budgets of HK$30,000 to HK$60,000 per month.
Shatin/Tai Po (-3.7%) recorded the largest rental fall among all submarkets in Kowloon and the New Territories given that a slew of new developments in Kau To Shan have drawn new tenants from the area, followed by Ho Man Tin/Kowloon Tong (-2.2%) and Discovery Bay (-1.1%). Sai Kung (-0.6%) and Clear Water Bay remained top draws for relocation from Hong Kong Island given that the districts represent good value for money, together with the advantages of low density and proximity to countryside and yacht clubs.
Townhouse rents increased marginally by 0.2%, ending seven consecutive quarters of decline since Q2/2019. The slight rental increase was due to a rental revaluation triggered by a record deal for 77 Peak Road. While townhouse rents are still 13.5% down from their recent peak in Q1/2019, availability of good quality houses is surprisingly limited. Several deals were inked during the quarter for around HK$350,000 to HK$400,000 per month.
Serviced apartment rents registered a fall of 1.4% in the first quarter of 2021 while apartment-like rents and hotel-like rents fell by 0.9% and 1.9% respectively. The rental downtrend has shown signs of stabilising after Q1/2020 given that serviced apartment rents dropped by 4.8% over the year from April 2020. Occupancy levels have remained low at 57% on average despite the fact that vacancy in some developments has gradually been taken up.
Apart from price competition between serviced apartments, operators have to face the threat from cutthroat pricing by hotel long-stay packages, since hotels are desperate to maintain occupancy with zero inbound tourism. Locals have remained the major demand driver for the market despite more modest budgets given the current economic environment.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The leasing market is still paused with local movement driven by tightening budgets as lower allowances and the lure of low-density living push tenants to consider off-island options."
Ms. Aradhana Khemaney, Senior Director, Head of Residential Services of Savills said: "We detect few signs of an expat exodus, but many will be waiting until the end of the school year in summer to make a decision and are making do for now. PRC demand has been curtailed by the travel restrictions but we believe will become a force to be reckoned with once they are relaxed."