• Bargain hunting investors are dominating market activity, but deals are hard to come by
• Commercial volumes have been heavily hit, falling by 36% YoY in January with further falls expected in February and March
• Strata office landlords are tending to cut rents to fill vacancies rather than selling assets at deep discounts
• Despite particularly tough conditions, retail landlords are not yet acquiescing to the 30% to 40% discounts asked by potential buyers, but units remain extremely hard to lease

Prominent real estate advisor Savills pointed out that the gap between prospective buyer and seller has been widening with Grade A offices in fringe Central asking for HK$35,000 per sq ft receiving offers of HK$25,000 per sq ft. The few deals being done were closer to offer prices with vendors facing difficulties in their own businesses and in need of capital.

Average Central Grade A office prices declined most by 11.5% in Q1/2020 while the general market registered a more modest rate of decline of 4.1%.

Retail investors are looking for more sizeable price discounts (30% to 50% compared to previous peak) than their office counterparts, with even fewer retail landlords willing to entertain. Nevertheless, with the global spread of the virus, stricter controls on borders and limits on social activities leading to a dramatic reduction in retail sales and visitor arrivals (-96% in February 2020), retail landlords are finding it hard to retain tenants and sustain occupancy even with deeply discounted rents and generous rental concessions.

Prime street shop prices fell by 6.5% in Q1/2020 as a result, with Tsim Sha Tsui and Mong Kok, the two shopping districts most popular among Mainlanders, registering greater declines.

Many prospective office buyers are currently holders of cash in order to weather any possible turbulence in their own businesses, making them ultra-cautious when making investment decisions. Retail investors meanwhile are also paused, not just because of the current situation, but also because the retail market may be about to undergo another structural shift after enjoying years of success supported by Mainland spending. Looking ahead, e-commerce looks set to be a major beneficiary from the outbreak while vacancies will present the challenge of finding new tenants and an updated and relevant trade mix.

Mr. Simon Smith, Senior Director, Research & Consultancy commented: “While commercial investment sentiment has hit a new low, China’s cautious economic recovery, the benign interest rate environment, tight short-term commercial supply conditions and further rounds of fiscal stimulus may help to sustain price levels.”

Mr. Peter Yuen, Managing Director, Head of Investment & Sales said: “Volumes in both the office and retail investment markets are tapping new lows making price discovery problematic but deals are still being done, even in these tough market conditions. A more protracted recovery will increase the likelihood of finding distressed stock at deep discounts to 2019 peaks later in the year.”

Ms. Sharon Fong, Senior Director, Retail Sales said: “The retail market peaked in 2014 and has seen a particularly steep adjustment since then. More recently the social unrest and the virus has been a perfect storm for the sector while at the same time underlying fundamentals are being disrupted by e-commerce so even after the outbreak, investors are unsure what future we will emerge into.”