Hong Kong's office and housing markets show modest stability amid challenges

HONG KONG, July 9, 2025 – Over the last six months, Hong Kong's office leasing and housing markets have demonstrated modest stability despite facing numerous challenges. Looking ahead, while prices and rents across most sectors are anticipated to decline further in the second half of 2025, low HIBOR rates are expected to boost home sales, and the wave of IPOs will likely support office leasing demand, according to JLL's mid-year market review and forecast.

Cathie Chung, Senior Director of Research at JLL, said: "Office and hotel investments are also expected to benefit from the new student housing policy. Although leasing activities in the retail market will stay active as landlords are willing to reduce rents, vacancy rates in shopping malls will continue to reach record high due to new supply pressure."

Key points:
 

• Leasing demand is concentrated on trophy offices in key submarkets, while the broader Grade A office market faced challenging market conditions.
• Cost-consciousness among retailers and landlords’ increased flexibility regarding leasing terms will further pressure retail rents.
• The latest governmental policies on commercial conversion to student housing will attract universities to acquire hotels or Grade B/C offices.
• We have revised our forecast for the capital values of luxury residential properties from a fall of 5% to a decline of 5-10% this year.
• The government should consider a profit-sharing model to ease the financial burden on developers for developing the pilot areas of the Northern Metropolis.

Market sentiment improved in the first half of 2025, with an uptick in activity and ongoing negotiations among premium office buildings in prime locations, particularly in Central. Although overall vacancy rose to a high level of 13.6%, vacancies in Wanchai/Causeway Bay and Tsimshatsui decreased to 9.5% and 7.9%, respectively.

The market recorded a positive net absorption of 130,700 sq ft in the six months of this year, primarily due to increased transactions in key submarkets such as Central, Wanchai/Causeway Bay, and Tsimshatsui. This reflects the tenants' strong interest in prime office locations.

Leasing activities and inquiries for trophy and high-quality buildings in each submarket have also increased, those premium spaces keep attracting tenants despite the current cost-conscious market environment.

The FIREBS industry remains the most active sector in the leasing market, accounting for 57.5% of the total leasing volume in the first half of 2025. Financial trading and asset management firms are particularly active.

The rise in IPO activities has stimulated demand from legal firms and financial-related services firms for office space in prime areas. With the IPO market expected to remain active in the second half of 2025, we believe it will bolster growth in the office market, and rents of some buildings in Central will stabilise later this year, ahead of others.

Sam Gourlay, Head of Office Leasing Advisory at JLL in Hong Kong Island, said: "We anticipate that rents for prime Central buildings will stabilise by the end of this year, largely driven by tenants' heightened interest in trophy assets. In this competitive landscape, anchor tenants are capitalising on a first-mover advantage, engaging in negotiation for new projects several years ahead of their completion. Leasing activities are expected to improve in the second half of this year. However, vacancy will remain high due to the abundant new supply and marketable space. Overall market rents will continue their downward cycle in 2025, dropping around 5% this year." 

Hong Kong Grade A Office Indicator – % Change

Total retail sales contracted by 4.0% y-o-y in the first five months of 2025, driven by strong northbound and outbound travel, changing consumer spending patterns, weak domestic spending sentiment amidst widespread store closures and rising unemployment rate. Meanwhile, per capita tourist shopping and dining spending dropped 8.9% despite continuous inbound tourism revival.

Restaurant closures were a significant concern in the first half of the year. Total restaurant receipts declined by 0.6% y-o-y in 1Q25, following a 0.1% decrease in 2024. Looking at specific restaurant types, “non-Chinese restaurants”, “fast food shops” and “bars” saw positive receipt growths.

Figures from JLL show that the vacancy rate of High Street Shops in core shopping districts remained stable at 10.5% at the end of June. Conversely, vacancy rate of Prime Shopping Centres increased to another record high of 10.5% due to the new supply and increased vacated area in existing developments.

Notably, landlords have generally been more willing than before to effectively lower rents through methods such as extended rent-free periods this year. It attracted various industries to expand despite challenging market conditions. Leasing demand primarily came from light refreshments, gyms, sportswear, kids entertainment centres, and pharmacies. International luxury brands have recently begun to expand. Leasing activity continued to concentrate in core shopping districts.

New non-local retailers continued to enter Hong Kong, despite a 28% y-o-y drop in the first half of 2025 due to the high base of comparison from last year. About 72% of newcomers are F&B operators. Retailers from the Mainland are the most active group, accounting for 44% of the total newcomers, followed by Japan (24%) and South Korea (18%).

Jeannette Chan, Senior Director of Retail at JLL, said: "Leasing momentum in core shopping districts remains active. In response to the challenging market conditions as well as retailers’ cost-conscious sentiment, landlords, particularly those with High Street shops, are increasingly flexible on lease terms. They are offering longer rent-free periods for both new leases and renewals to attract and retain tenants. The ongoing rental correction and evolving leasing strategy present opportunities for retailers to secure more favourable terms and for international brands to establish a footprint in the Hong Kong market,"

"Moving forward into the second half of 2025, approximately 600,000 sq ft of new prime retail space is slated for completion, exerting upward pressure on Prime shopping centre vacancy rates. We expect retail rents of High Street Shops and Prime Shopping Centres to drop 5-10% this year," she added.

Hong Kong Prime Retail Indicator - % Change

Despite low HIBOR, persistent credit tightening by banks and macroeconomic uncertainty remain the major headwinds in the investment market. The total investment volume of commercial properties valued at HKD 50 million or above dropped 25.7% to HKD14.6 billion in the first half of 2025, following a slight rebound in the second half of 2024.

Bolstered by Hong Kong Exchanges and Clearing's acquisition of 147,000 sq ft at One Exchange Square, office transactions accounted for 62.7% of the total commercial investment transactions, the largest share among the commercial real estate sector.

However, office capital values are facing strong downward pressure, and caution still prevails among many investors due to the weak rental outlook and tight financing. Investment volume was mainly driven by end-users. Capital values of Grade A offices have dropped 49.6% since the market peak in the fourth quarter of 2018.

Investment volume of retail property was subdued amid still-weak retail sales performance and rental outlook. However, retail properties garnered investors’ focus in the search for lucrative yields, as well as end-users who strategically acquire assets at lower prices in anticipation of long-term cost savings.

The introduction of US tariffs, despite the exact impact on trade yet to be reflected, further suppressed investment interest in industrial properties due to a highly volatile and uncertain situation.

Oscar Chan, Head of Capital Markets at JLL, said: "Persistent headwinds, including restrictive bank financing and ongoing global uncertainties, are expected to continue throughout the second half of this year. These factors will likely encourage investors to maintain a vigilant and discerning approach to the commercial real estate market. End-users will continue to be the major buyers in the market. The government can seize this opportunity to acquire high-quality premises at discounted prices. This could help reduce the government's rental expenses in the long run, especially given the current fiscal deficit."

"Looking ahead, the strengthened IPO performance is anticipated to bolster office leasing activity, potentially stimulating increased investor interest in the office sector. The latest policy on commercial conversion to Purpose-Built Student Accommodation (PBSA) will attract more university buyers to look for hotels and some Grade B/C offices," he added.

Hong Kong Investment Indicator – % Change

Mixed signals have locked bulls and bears in a standoff in the housing market. Lower HIBOR, rising stock prices, and a reduction in stamp duty for properties valued between HKD 3 million and HKD 4 million have positively impacted the housing market. However, geopolitical uncertainties, record high negative equity levels over the past 22 years, developers' discounts exceeding 30%, and a looming commercial real estate crisis present significant headwinds.

Despite a slight recovery to about 20,000 secondary transactions in the first half of 2025, secondary market volume remains below the 2018-2024 average. This marginal improvement in sales volume is insufficient to justify a major price rebound, as previous rebounds were typically preceded by transaction volume gains of 50% or more.

The primary market has about 93,000 new homes available for sale by the end of March, with rising number of unsold units in completed projects. By the end of this year, it will take 56.7 months for the market to digest this inventory, higher than the average of 51.3 months between 2015 and 2021. Developers must continue price cuts, leading to a prolonged price correction. No sustainable recovery is expected until 2026, when inventory decreased to a healthy level.

On the other hand, encouraging macroeconomic indicators point to a potential moderation in the pace of price declines. As the amount of time deposits have doubled compared to 2021 levels, rising positive carry may redirect capital into the property market amid widening yield advantages. Meanwhile, population growth from talent visas (27,000 in Q1) is expected to initially boost rental demand before converting to home purchases.

Joseph Tsang, Chairman of JLL in Hong Kong, said: "In the coming six months, developers will need to continue offering discounts on new projects to ensure steady sales velocity. Persistent HIBOR levels below 2% may boost home sales upon market acceptance of this trend's longevity. Residential rents are projected to reach record highs, driven by sustained inflows of non-local talents and students. We expect prices of mass residential properties to drop by 5% this year. Since increasing listings of distressed commercial properties will affect the owners of luxury residential properties, we have revised our forecast on capital values of luxury residential properties from a fall of 5% to a decline of 5-10% this year."

Hong Kong Residential Indicator – % Change

The government plans to release pilot areas of the Northern Metropolis development for large-scale land disposal in the second half of this year. The initial plan from late 2024 attracted 22 Expressions of Interest (EOI).

However, the current market conditions may dampen initial investors’ enthusiasm. Tighter credit makes financing more expensive for developers, while persistent price cuts in new housing projects affect potential profitability. Developers must also undertake significant responsibilities, including site formation and infrastructure works, construction of roads and open spaces, and returning non-residential sites to the government. These factors could limit profitability and dampen the private sector’s interest.

Alkan Au, Head of Value and Risk Advisory at JLL, said: "Large-scale land disposal is a crucial step in accelerating development. However, several potential concerns from investors' perspectives should be noted and clearly delineated. Upfront payments for larges site are currently substantial and difficult to finance. Most developers lack expertise in developing public infrastructure such as roads and drainage systems. Additional costs may be incurred for third-party consultancy and planning, potentially capping the project's profitability. Financing can be difficult for private investors undertaking public infrastructure development."

He has the following suggestions:

• A profit-sharing model which the government can claim residual payment from residential sale profits. This phase-by-phase payment approach could ease some of the financial burden on developers.
• Given the large scale of the land, flexible building covenants can be adopted to provide developers with flexibility if they encounter problems, especially with the public infrastructure component.
• The government should provide adequate guidance on public infrastructure development.
   

"Given the current large stock of unsold new flats and the projected rise of subsidised sale flats to an average of 11,300 units in the next five years, the market needs time to absorb the existing supply and upcoming supply from both private and public projects. Therefore, focusing on the Northern Metropolis development while postponing the Kau Yi Chau Artificial Islands project until the foreseeable housing supply can no longer satisfy expected demand seems justifiable," he added.