2 February 2015

Commercial property outlook for Q4 2014 weakest in Hong Kong

Singapore Marina Bay business district at night.

The RICS (Royal Institution of Chartered Surveyors) Global Commercial Property Monitor for Q4 2014 has indicated that although key economic indicators continue to point to a softening in the economy in Hong Kong, economic growth is likely to pick up at a steady pace this year.

In Hong Kong, the RICS Occupier Sentiment Index* (OSI) fell slightly over the quarter from +4 to -3, while the RICS Investment Sentiment Index* (ISI) remained in negative territory in Q4, recording a value of -3. Tenant demand continued to increase in both office and industrial sectors, but a sharp decline was reported in retail. 

Over the next three months, rents are expected to grow in the office and industrial sectors, but fall in the retail arena. It is worth highlighting that on the investment front, the supply of commercial property for sale grew across each sector with retail units registering the steepest increase. Finally, over the next twelve months, the capital value of prime office space is expected to grow by 4%. Prime industrial space is expected to grow by 3%. No growth in capital value is predicted for prime retail space.

In mainland China, moderation in economic growth continues to weigh on overall commercial property sentiment. Moderate occupier demand and growing available space have pushed the headline rental value expectations into negative territory. 

In Singapore, sentiment in the investment market is weakening. Strong rental growth is expected in the office sector over the coming three months, but rents are expected to decline for industrial and retail sectors. 

In Japan, the near term outlook is still robust despite significant economic headwinds. Tightening market conditions continue to place upward pressure on rents, which are anticipated to rise strongly across the board at both the three and twelve month horizons.

RICS Senior Economist Andy Wu said: "We believe Hong Kong remains in a weaker position when compared to other Asian markets, with the growing uncertainty of the political situation and the lack of growth in the economy likely causing an unstained level of occupier activity and smaller scale flows of capital into the city this year. Values are faltering as a result of occupiers and investors being cautious over market prospects. 

"As such, the RICS Q4's overall property performance isn't surprising. Indeed, sentiment has been soft in line with its underlying economic fundamentals, and whilst it is important to focus on the wider market, it is worth highlighting that certain sub-sectors still remain downbeat, namely retail. The Q4 decline provides further evidence of the fragility of retail sector health and we believe this will continue until there is a sustained upturn in consumer spending growth. 

"Turning to Singapore, pretty much the same could be said of occupier and investor markets, with commercial property performing unsatisfactorily.

"As the economic challenges in China continue throughout rest of the year, it is likely to see a more pronounced divergence in the performance of commercial property markets between Tier 1 and lower-tier cities. Indeed, the economic slowdown has continued to hold back occupier activity, resulting in static rental values. Interestingly enough, SMEs and larger firms have continued to exercise a cautious approach to take space. They have attempted to minimise risk and cost through delaying the expansion or looking to downsize space. This reluctance to commit to new space has weighed on activity and left a growing quantity of stock in many of the Chinese cities.

"Q4 has continued to see positive performance in Japan. In fact, this positive trend in the commercial property sector is inconsistent with what is also being reported in the economy generally, through business surveys and other key economic data. While the levels of uncertainty surrounding the economic outlook remain, this has not prevented investors purchasing in Japan's largest cities, namely Tokyo and Osaka. What remains to be seen is whether Japanese commercial property market can continue to fare well, with a growing sense of pessimism for the economy."

*RICS Occupier Sentiment Index (OSI): The OSI is constructed by taking an unweighted average of readings for three series relating to the occupier market measured on a net balance basis: occupier demand, the level of inducements and rent expectations.

RICS Investment Sentiment Index (ISI): The ISI is constructed by taking an unweighted average of readings for three series relating to the investment market measured on a net balance** basis: investment enquiries, capital value expectations and the supply of distressed properties.

**Net balances: Net balance percents, or scores, are calculated by subtracting the numbers of respondents reporting 'down' from the number who reported 'up'.