This file photo dated March 9, 2022 shows commercial and residential buildings in Hong Kong. (PHOTO / AFP)

Hong Kong’s commercial real estate market continued to bear the brunt of global economic challenges and high interest rates in the third quarter, but office and retail markets showed signs of improvement as demands for relocation, consolidation, and tourist-oriented trades continue to improve, according to a report by real estate services provider CBRE on Wednesday.

Leasing volume of Grade-A office spaces in Hong Kong increased by 32 percent quarter-on-quarter to reach one million square feet as of the end of September, which was similar to the volume in the first quarter of 2023. 

Hong Kong’s major banks raised their best lending rate by 12.5 basis points in the third quarter, following another 25 basis points interest rate hike in the US this July

The office market saw its net absorption turn positive in the three-month period, with leasing demand mainly driven by relocation and consolidation. Although total vacant space still remained high at 13.6 million square feet, the overall vacancy rate in the city edged down by 0.2 percentage points to 15.8 percent.

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“Office leasing demand has picked up slightly from the second quarter of 2023, with a noticeable level of activity found in Kowloon East where some buildings captured the demand from occupiers relocating out of Kowloonbay International Trade & Exhibition Centre (KITEC) for the site's up and coming redevelopment plan,” said Ada Fung, executive director, head of advisory, transaction and office services at CBRE Hong Kong. 

“Yet the overall vacancy stabilized at approximately 16 percent despite the positive net absorption in the quarter.”

The retail leasing market continued to show “healthy” performance, supported by an increase in tourist arrivals and an improving local consumption market. Although overall leasing volume for high street shops fell by 14.4 percent in the July-September period from the quarter earlier, the growth of rental accelerated by 2.4 percent, compared with 1.2 percent in the first quarter and 1.9 in the second quarter.

“The retail leasing market continued to track well in the third quarter, owing to improved inbound tourism which encouraged some retailers to look for expansion opportunities in the core shopping districts,” noted Lawrence Wan, senior director and head of advisory and transaction services at CBRE Hong Kong. 

“However, residents' enthusiasm for outbound travel during the school holidays also ensured slower business growth for retail outlets in neighborhood locations, balancing the overall picture.”

Wan expects the Golden Week holidays and the government's Night Vibe initiative to generate increased footfall and business growth, providing a favorable environment for retail, and food and beverage businesses. Retail leasing is expected to maintain a healthy momentum in the fourth quarter, he said.

According to CBRE, there was a significant increase in tourist arrivals during the summer months, with a total of 10.4 million visitors recorded in the third quarter. This marked a 23 percent rise from the 8.4 million arrivals in the second quarter. 

As for the industrial leasing market, Samuel Lai, head of advisory and transaction services-industrial and logistics at CBRE said, “With the trade sector remaining overall weak and that effective vacancy staying low, industrial leasing momentum continued to be slow in the third quarter”. 

“Should economic recovery in the Chinese mainland accelerate to drive trade sector growth, the outlook of Hong Kong’s logistics sector should improve in upcoming quarters.”

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Hong Kong’s major banks raised their best lending rate by 12.5 basis points in the third quarter, following another 25 basis points interest rate hike in the US this July. Under the high interest rate environment, the real estate investment market was “comparatively quiet”, which resulted in deeper negative returns, according to the firm.

“While borrowing costs are expected to stay at high levels for longer, the investment market will likely remain overall quiet for the remainder of the year,” concluded Reeves Yan, executive director and head of capital markets at CBRE.

If the government eases part of the restrictive measures on property demand in the upcoming Policy Address, the overall investment market sentiment will probably see an improvement as the year draws to a close, Yan projected.