HONG KONG, 11 December, 2024 – Hong Kong's commercial and residential markets continued to consolidate in 2024 amid high vacancy rates and weak economy. However, the removal of cooling measures in the housing market and the recent rate cuts have boosted market activity.

Cathie Chung, Senior Director of Research at JLL, said: "In 2025, the market will still face oversupply issues and economic uncertainties. The economic and interest rate policies under the new US administration will significantly impact the housing and property investment markets. The office leasing market is expected to gradually improve, with a significant reduction in new office supply anticipated from 2027."

• Share of demand for office spaces 50,000 sq ft or above has rebounded to the highest level since 2019. 
  
  
• Overall rents for Grade A offices are expected to decline by 5-10% in 2025.
  
  
• Retail leasing activity is polarised, with strong demand in first-tier streets in prime shopping districts, while lower tier streets struggle to attract tenants.
  
  
• Retail rents are projected to decrease 0-5% in 2025 after two years of recovery.
  
  
• Uncertainties over the new US administration's economic and interest rate policies has led local investors to adopt a wait-and-see approach to commercial property investments.
   
• Capital values across the three commercial sectors are expected to drop 5-10% in 2025.
  
  
• 2024 marked a pivotal year for the housing market, with the removal of cooling measures and falling rates, yet home prices still dropped by 6.8%.
  
  
• Prices for mass and luxury residential properties are expected to decline by about 5% in 2025.
  
  
• The government should simplify land sales conditions and divide sites into smaller parcels to attract more developers to participate in land bidding.
  
  
• It is time to review the URA's Home Purchase Allowance for owner-occupied domestic properties to enhance the attractiveness of redevelopment projects during downturns.

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^{*Preliminary; #As of November}

While land supply remains important, the government must prioritise urgent needs within its limited fiscal budget, such as improving infrastructure and promoting the transition to an innovative and technological economy.

Alkan Au, Head of Valuation Advisory at JLL, suggested: "Developers are reluctant to acquire land due to the weak residential sales market and high investment costs. Land prices continue to face downward pressure. To enhance revenue from land sales, the government should focus on improving the investment environment for developers. We have three key recommendations to achieve this goal."

For public land sales, the government could consider the following measures during the downturn:

1. Attach fewer supplementary conditions to land sales

• Attach fewer requirements. For example, provision of Government, Institution or Community (GIC) facilities, and road works, etc.
  
  
• Additional conditions such as ESG & GIC facilities, aboveground carpark should be exempted from maximum GFA allowed.
  
  
• Remove the conditions of requiring developers to return portion of GFA to the Government upon completion e.g. recent sites in Yuen Long and Tuen Mun.

2. Reduce the site area into smaller land parcels for each sale

• Consider staged payment of land premium for large-scale development sites, as large sites will reduce the incentive of developers due to longer development and payback periods.
  
  
• Breaking down the land into smaller parcels can increase developers' interest and the likelihood of successful bids, requiring a lower initial investment for consideration.

The tender of URA's redevelopment projects is another key source of land supply. To streamline land allocation, the government should review the URA's Home Purchase Allowance for owner-occupied residential properties and adjust the assessment base from the value of a 7-year-old flat to that of a 10-year-old or older flat. This adjustment would reflect the drop in housing prices, potentially lowering acquisition costs and enhancing project profitability in a downturn market. This can help ensure the continuity and progress of urban revitalisation.

"Given the high investment costs and lack of profitability, developers are losing interest in building Home Ownership Scheme flats. The government could explore the option of repurposing these sites for public rental housing development to address the urgent need for public housing," he added.