High Interest Rates Set to Impact Residential Prices Through 1H 2024, End-Users to Drive CRE Investment Market

  • 2023 YTD Grade A office net absorption (as of mid-November) was negative at –267,100 sq ft NFA; rents remained under pressure, down 7.2% YTD.
  • The retail market continued its gradual recovery process, with average high street vacancy rates in Q4 dropping further to 8.2%; high street rents increased in a range of 5%–10% in 2023.
  • The high interest rate environment and stock market volatility have slowed the residential market, with 2023 full-year transaction numbers expected to be at a 10-year low; prices to fall by around 5% this year and by 0%–5% in 1H 2024.
  • Capital market sentiment remained cautious, with large-sized deal (non-residential, exceeding HK$100 million) investment volume in 2023 YTD (as of December 5) recorded at HK$39.7 billion, down 33% from the 2022 full year. Investment transactions were mainly driven by local capital and end-users.

HONG KONG SAR – Media OutReach Newswire – 7 December 2023 – Global real estate services firm Cushman & Wakefield today held its Hong Kong Property Markets 2023 Review and 2024 Outlook press conference. Corporate occupiers have remained cautious through 2023 in the face of an uncertain global economic recovery. Consequently, new office leasing demand has stayed relatively subdued, in turn exerting further pressure on office rental levels. In the retail industry, overall sentiment continued to improve, supported by the border reopening and the return of tourists, and with the growing presence of experiential retail strategies providing a new impetus to the industry’s growth potential. However, the persistent high interest rate environment coupled with stock market volatility have dampened home purchase sentiment, with the residential market witnessing declines in both transaction numbers and prices. In the CRE investment market, end-users are becoming the primary drivers of activity.

Grade A office leasing market: Positive net absorption returned in Q4, but high availability continues to weigh on rents

Overall Grade A office net absorption in Q4 2023 totaled 379,700 sq ft as at mid-November, mainly driven by pre-committed space at a newly completed office building in Kowloon West. The Kowloon West submarket alone registered net absorption of 334,200 sq ft, while all other submarkets, with the exception of Greater Central, also returned to positive territory. In terms of new leasing activities, the Insurance sector accounted for the highest share of new leases by area, at 39% of the total, predominately due to a significant pre-leasing requirement. The Banking & Finance sector took 14% of new leases by area, followed by the Public sector at 13%.

In reviewing 2023, the overall business environment has remained cautious amid the prevailing global economic uncertainty, with cost savings a top priority for occupiers. As a result, the office leasing market has yet to see a significant rebound even after the border reopening. Overall absorption for the YTD up to mid-November remained in negative territory at –267,100 sq ft, in turn pushing the availability rate up to 18.0%. This has forced office rents to remain under pressure, dropping by 7.2% for the YTD as of the end of November (Chart 1).

John Siu, Managing Director, Head of Project and Occupier Services, Hong Kong, Cushman & Wakefield, said, “After the border reopening, the recovery in office leasing momentum has been slower than the market expectation. If accounting for the remaining new supply potentially to be completed before 2023 year-end, the availability rate could surpass 19% by then, exceeding the record high of 18.1% in Q1 2004. In addition, with nearly 1.2 million sq ft of new office supply being scheduled next year, we forecast that office rents will continue to adjust downwards by 7% to 9% in 2024, providing greater options of quality office spaces with attractive pricing for occupiers planning for upgrades or relocation.”

Retail leasing market: High street vacancy rates further declined, supporting steady rental recovery

The gradual return of tourists continued to drive Hong Kong’s retail market recovery, with total retail sales amounting to HK$336.1 billion for January to October 2023, an increase of 17.2% y-o-y, although coming from the low base of last year. The Jewellery & Watches retail category recorded the most significant growth at 55.0% y-o-y, while Fashion & Accessories and Medicines & Cosmetics also rose by approximately 40% y-o-y. Jewellery & Watches brands, together with Medicines & Cosmetics stores, continued to expand their presence in core locations in Q4, prompting the overall vacancy rate to drop further from the levels seen in the last three years. The vacancy rate in Causeway Bay, a traditional tourist shopping district, dropped to 2.6%, similar to its 2019 level. The vacancy rate in Tsim Sha Tsui dropped to 10.7% q-o-q, while other key retail districts such as Central and Mong Kok maintained stable vacancy rates.

High street retail rental levels registered low single-digit growth in Q4, supported by the tightened vacancy rates across districts. Year-on-year rental increases across all districts ranged from 5% to 10%, with Central recording the most notable strengthening at 9.7% y-o-y (Chart 2). In the F&B sector, rents in all districts also recorded mild q-o-q increases, with y-o-y growth ranging from 5% to 7%.

Kevin Lam, Executive Director, Head of Retail Services, Agency & Management, Hong Kong,

Cushman & Wakefield, commented, “In 2023, although tourists are returning to Hong Kong, there are still concerns regarding global political and economic uncertainties. This, added to the changing consumption pattern of tourists and the emerging trend of Hongkongers heading to the mainland for consumption, means that most international brands have remained conservative in business expansion. In addition, the pandemic boosted the popularity of online shopping, with online sales accounting for 9.9% of total retail sales in 2022, as compared to 6.3% in 2020. Despite the vacancy rate in Causeway Bay now falling back to the 2019 level, brand mixes have largely changed and evolved during the three-year pandemic period as rents are more attractive, with some traditional luxury brands being replaced by pharmacies and daily necessities stores. Jewelry brands also remain cautious in their expansion strategies, although some are still opting to set up in prime locations for better footfall and to stay close to peer brands, with Tsim Sha Tsui a popular submarket.

“Looking ahead to 2024, further upgrading and consolidation activities are expected, while consumers will place more emphasis on seeking experiential consumption, which will further help improve vacancy and support rents. We expect high street rents to maintain single-digit growth in the range of 2% to 7% in 1H 2024. However, landlords and retailers must focus on providing customers with more diverse retail experiences, by including retailtainment, sports, fitness, and experiential concepts, which will not only stimulate foot traffic and revenues, but also help strengthen community engagement and enhance corporate branding from an ESG perspective.”

Residential market: Downward adjustment in home prices to remain in 1H 2024

Persistent interest rate hikes coupled with a downward trend in the stock market prompted potential home buyers and investors to retain a wait-and-see outlook in 2023, in any absence of favorable factors, leading to a slowdown in both primary and secondary market residential transactions. Total residential transaction numbers in Q4 are currently forecast to reach 7,580, down 17% q-o-q and 10% y-o-y, bringing full-year transaction numbers to 42,970, the lowest of the last decade. Based on the latest government data, overall residential prices have turned from growth to decline since May 2023, resulting in a YTD decline of 4.0% as of October 2023, after falling for six consecutive months. This retreat has offset all the prior gains from the border reopening effect earlier this year. The fall in residential prices was particularly noticeable after July 2023, when most banks in Hong Kong followed raised interest rates to align with the U.S. market. In contrast, the residential rental market has been resilient, supported by growing demand from incoming talent and with fewer residential units available for rent, with the overall rental index rising by 6.2% YTD, as of October 2023.

Edgar Lai, Senior Director, Valuation and Consultancy Services, Hong Kong, Cushman & Wakefield, highlighted, “According to Cushman & Wakefield’s latest data, overall residential prices have fallen by 5% for the YTD, as of early December. In addition, Cushman & Wakefield’s popular estate home price tracker showed price declines in Q4 across different market segments. As developers have offered more discounts for primary home sales, this has shifted away some purchasing power and hence weighed on secondary residential market prices. In Q4, prices at City One Shatin, representing the mass market, declined by 6.4% both q-o-q and y-o-y. Prices at Taikoo Shing, representing the mass market, were down 5.8% q-o-q and 8.1% y-o-y, while Residence Bel-Air, in the luxury market bracket, dropped 6.5% q-o-q and 7.3% y-o-y. All three price levels have now been dragged back to their lows recorded at the end of 2022.”

Rosanna Tang, Executive Director, Head of Research, Hong Kong, Cushman & Wakefield, added, “Looking ahead, and although the latest Policy Address announced a series of property cooling measures, we do not expect to see a quick rebound in the residential market, as these policies will mainly benefit incoming talent. Local home buyers and investors will likely remain conservative, and on the sidelines of the market. The high interest rate environment and stock market volatility will likely persist in the coming months, and developers will be keen to offer primary sales at discounts to attract buyers given the ample amount of unsold primary market flats. In turn this will make it difficult for secondary home prices to get back on track to growth in the near-term. We forecast 1H 2024 home prices to further decline in the range of 0% to 5%. As for transaction numbers, developers are expected to gear up their sales launches next year, and we expect the total residential transaction volume to pick up by around 20% in 2024 from the low base this year, to about 50,000 to 53,000 units.”

Non-residential investment market (deals exceeding HK$100 million): Market remains quiet amid high interest rates, with transactions dominated by local capital and end-users

Investors have remained cautious in 2023 amid high interest rates and borrowing costs, and as the market saw very limited assets offering attractive rental returns. The non-residential investment market (deals exceeding HK$100 million), has recorded 71 large transactions for the year as at December 5, with total transaction volume down by 33% y-o-y to record HK$39.7 billion (Chart 4). While the market witnessed price corrections in most property assets, it has provided a window for end-users and investors with less real estate in their portfolio to go bargain hunting. In Q4, end-users with longer-term real estate needs in Hong Kong seized this opportunity to bottom-fish before interest rates fall and property prices rise again, so as to hedge their long-term occupancy costs. In 2H 2023, local and mainland China capital accounted for 70% and 25% of the total transaction value, respectively, while investment activities by foreign funds stayed relatively quiet.

Tom Ko, Executive Director and Head of Capital Markets, Hong Kong, Cushman & Wakefield,

concluded, “In 2023, office investments regained market traction, accounting for more than 30% of the total transaction volume in the quarter, mainly supported by end-users, with some cases of existing occupiers purchasing properties for self-use purposes. Office property prices have fallen notably since the pandemic, making them attractive for end-users in the market. In addition, redevelopment sites, retail podiums, and high street shops with stable incomes were also favored by investors, with private land sites and retail assets accounting for 21% and 20% of the total investment volume, respectively.

“Looking ahead to 2024, the investment market is expected to see active participation by end-users, while investors are likely to focus on well-positioned hotel assets in good locations with conversion potential into co-living, multi-family and student accommodation properties, supported by the revival of visitor arrivals and growing demand for rental apartments from incoming professionals and students. The market also continues to see distressed or receivership assets being put up for sell, some offered with greater discounts, and this could spur more en-bloc transactions to take place next year. We forecast total transaction volume in 2024 to lift by 20% from this year’s low base to around HK$50 billion.”

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About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In Greater China, a network of 23 offices serves local markets across the region. In 2022, the firm reported global revenue of US$10.1 billion across its prime services of valuation, consulting, project & development services, capital markets, project & occupier services, industrial & logistics, retail and others. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit or follow us on LinkedIn ().


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