Gao Li: Rental prices for Grade A office buildings in Hong Kong dropped by 9% this year compared to the previous year, while rental prices for prime street shops increased by 1.5% and warehouse rentals decreased by 4%.

Recently, Colliers International released its "Colliers Market Report for the First Quarter of 2025," stating that with expected rate cuts, this year's Hong Kong real estate market is full of challenges but also opportunities. The vacancy rate for Grade A office buildings is expected to rise, further lowering rents, while the retail market is mainly dominated by smaller retail shops and experiential services leases, driving up rents for prime street shops. With weakened logistics demand, the industrial leasing market is mainly driven by renewals and relocations of third-party logistics. The overall investment market has shown cautious performance at the beginning of the year, but demand for education-related properties is expected to increase. Colliers Hong Kong research director and retail consultant Cindy Li stated that the Hong Kong market has generally been quiet in the first quarter, as investors maintained a cautious attitude due to the rate cuts being put on hold in mid-December last year. With new supply entering the market, it is expected that the vacancy rate for Grade A office buildings in Hong Kong will continue to rise, leading to a decline in rents. The retail market, on the other hand, is facing a relatively optimistic sentiment, with rents for prime street shops recording quarterly and annual increases, and rents expected to further rise with a series of large events approaching. In terms of capital markets, hotel properties dominated the season's transactions, accounting for 45% of total investments. Looking ahead, banks are expected to gradually sell off recovered assets, and the Fed may cut rates in mid-2025, potentially boosting investment activities. Due to limited corporate expansion intentions for office space, net demand for Grade A office buildings in Hong Kong in the first quarter of 2025 slightly decreased, leading to a 3% quarterly decline in overall rents to HKD 47.2 per square foot. Rents in the core Central/Admiralty area recorded a quarterly decline of 3.8%, a larger decline compared to other submarkets. Demand shifted towards smaller office spaces with 65% of new leases in the first quarter involving net leasable area below 4000 square feet. The first quarter recorded a net absorption of negative 220,000 square feet of net leasable area, with a vacancy rate of 17.5%, and the most significant increase in vacancy area was seen in East Kowloon. Colliers Hong Kong corporate client services director Betty Yin stated that with about 3 million square feet of office space entering the market this year, the vacancy rate will further rise, with rents expected to decline by another 8-10% (9%) in 2025. More and more landlords are adopting competitive leasing strategies to retain and attract tenants. Environmental, social, and governance (ESG) certifications for existing buildings are becoming more prevalent, with the number increasing significantly from 4 in 2022 to 36 by the end of the first quarter of 2025, indicating that office spaces that meet ESG standards tend to attract large or global tenants. Although retail sales for the first two months of 2025 decreased by 7.8% year-on-year, overall rents for prime street shops increased by 1.3% quarterly and 2.6% year-on-year, with a forecasted 1.5% year-on-year increase for the whole year, and Central outperformed the general market with a quarterly rent increase of 1.9%. Leasing activities for prime street shops were dominated by mainland Chinese and overseas brands, with notable transactions including CR7Life at Times Square, Cosme at Eton Tower, and "Fook Moon Chuen Ga" on Haven Street. Colliers Hong Kong research director and retail consultant Cindy Li stated that Chinese mainland enterprises are expected to continue to drive the retail leasing market this year. Units ranging from 1500-2000 square feet will continue to be sought after by existing retailers and operators, while larger units will mainly attract large O2O (online to offline) operators as shopping behaviors of tourists shift from buying luxury goods to experiential shopping, larger units will primarily attract large O2O operators. In the coming quarters, with the opening of the Kai Tak Sports Park further boosting inbound tourism, the Hong Kong retail market is expected to thrive. Due to ongoing uncertainties caused by potential trade disputes, demand for logistics services remains weak, resulting in a 1.7% quarterly decline in warehouse rents and a 5.7% year-on-year decline. While third-party logistics remain active in leasing, most transactions in the first quarter of 2025 were renewals and relocations. Colliers Hong Kong corporate client services director Betty Yin stated that with ongoing uncertainties brought about by potential trade disputes, leasing in the coming quarters is expected to be mainly driven by renewals. More and more landlords are adopting flexible strategies, including rent reductions and incentives to attract or retain tenants, putting further pressure on rents, with rents expected to decline by 4% year-on-year in 2025. Due to investors waiting for certainty on rate cuts, the investment market showed cautious performance at the beginning of the year. Therefore, total transaction volume in the first quarter decreased by 36% to HKD 6.3 billion. Hotel properties accounted for 45% of total transaction volume, exceeding HKD 2.8 billion. Transaction volumes for office and retail markets declined quarterly from the relatively high base in the previous quarter. Bargain sales and seller/vendor financing still comprised a significant proportion of total transactions for the quarter. In the first quarter of 2025, capital values for office and industrial assets in Hong Kong decreased by 1.1% and 1.2% respectively annually. The bank expects office capital prices to further decline by 5-10% year-on-year in 2025. Colliers Hong Kong Capital Markets and Investment Services Director Jonathan Cheung pointed out that in the coming quarters, we can see signs of multiple investment opportunities in the market that can be seized. The market remains optimistic about the pace of rate cuts by the Fed this year, with local borrowing costs likely to decrease around mid-year, and banks will continue to sell recovered properties, providing opportunities for potential buyers. In addition, local educational institutions will significantly increase the number of non-local students admitted in the next academic year, increasing investor interest and transactions in the education sector, including student dormitories, learning centers, and school buildings.