Savills: Rental and investment demand gradually recovering, the Hong Kong real estate market is expected to develop more balanced by 2026.

On January 16th, CBRE released an article reviewing the Hong Kong real estate market in 2025. The Head of Research for CBRE in Hong Kong, Andrew Chan, stated that 2025 was a year of adjustment and resilience for the Hong Kong real estate market. Despite some sectors still having high vacancy rates and limited impact from interest rate cuts, both leasing and investment demand have gradually increased. While structural challenges still exist, diverse tenant demand and a loose monetary environment have laid a foundation for a more balanced market in 2026. The firm predicts that the momentum in office leasing will continue to strengthen, with tenants increasingly opting for quality-driven relocation strategies. Additionally, the continued influx of students and professionals will inject new dynamics into the residential market. In the fourth quarter of 2025, Hong Kong recorded a total leasing volume of 1.1 million square feet, a decrease of 17% from the previous quarter due to high base effect. The total leasing volume for the whole year reached 4.3 million square feet, a 2% decrease compared to the previous year. In the fourth quarter of 2025, Hong Kong achieved a net absorption of 1.5 million square feet, the highest level since the second quarter of 2008. All major districts recorded positive net absorption this quarter. The total net absorption for the whole year reached 2.1 million square feet, the highest annual total since 2018. In particular, Central recorded a net absorption of 234,800 square feet this quarter, the highest since the second quarter of 2015, and a total of 496,400 square feet for the whole year, the best performance since 2007. Despite the strong net absorption, the addition of new supply in 2025 reached 2.9 million square feet, causing the overall vacancy rate to increase by 0.4 percentage points to 17.3%, with a total vacant area of 15.9 million square feet. The vacancy rate in Central, however, continued to decline for the fourth consecutive quarter, dropping to 11.1%. Overall rental rates slightly increased by 0.6% quarter-on-quarter, marking the first growth since the second quarter of 2019. However, the overall rental rates for the whole year in 2025 decreased by 2.9% year-on-year, the smallest decline since 2019. CBRE's Chief Operating Officer for Advisory Services in Hong Kong, Ada Fung, stated that in the past few years, the office market in Hong Kong has faced pressure from new supply, leading to an increase in vacancy rates to 17.3% and a 2.9% drop in rentals in 2025. However, the market has demonstrated resilience, with leasing activities stabilizing since the middle of last year, driven particularly by strong demand from non-bank financial institutions and global investment companies, with Central recording its strongest quarterly net absorption since 2015. Looking ahead, diverse tenant demand and relocation strategies focused on cost control are reshaping the market landscape. With the ongoing vibrancy in the financial market and selective acquisitions and leasing activities by mainland Chinese companies, rental momentum in 2026 will further strengthen. The firm expects the vacancy rate to improve compared to 2025, but rental rates may decrease by approximately 3% for the year, providing tenants with greater bargaining power. The momentum in the Hong Kong retail leasing market improved for the third consecutive quarter in 2025, with a leasing transaction volume of 349,000 square feet in the fourth quarter. Demand from the F&B sector was particularly strong, as well as from the banking sector, with a leasing area of 48,600 square feet. In contrast, fashion brands, jewelry stores, and pharmacies showed weaker performance, accounting for only single-digit percentages of the total transaction volume for the quarter. The improvement in leasing momentum led to a 2.2 percentage point decrease in the vacancy rate for street shops in the four core retail areas, reaching 5.8%, the lowest level since the fourth quarter of 2019. The decrease in vacancy rates resulted in a 0.6% quarter-on-quarter increase in rental rates, with a cumulative increase of 2.9% for the whole year. Kelvin Wan, Head of Retail Leasing Transactions at CBRE Hong Kong, noted that the retail leasing market in Hong Kong remained active in 2025, driven mainly by the recovery in tourism and strong demand from the F&B sector. Core street shops and major shopping malls performed well, but community retail faces challenges from e-commerce and consumer downgrading. Looking ahead to 2026, with a large number of leases signed in 2023 set to expire, leasing momentum is expected to further improve. Experiential consumption concepts and deep collaboration between landlords and tenants will be key in attracting local shoppers and tourists. The low vacancy rates in some core street shop areas are expected to drive rental rates up by around 5% to 7% in 2026, while retail rents in non-core areas may see low to mid-single digit declines. While the leasing momentum has improved quarter-on-quarter, it remains relatively weak overall. In the fourth quarter of 2025, Hong Kong recorded a new leasing transaction volume of 1.1 million square feet, a decrease of 11% compared to 2024. Warehouse vacancy rates increased by 1.3 percentage points quarter-on-quarter, reaching a historic high of 13%. The total increase for the year was 5.5 percentage points, the largest annual increase on record. The rise in vacancy rates prompted owners to lower rents to remain competitive, resulting in a 2.0% quarter-on-quarter decrease in warehouse rents, with an 8.4% decrease for the whole year, the largest annual decline since 2002. Despite facing challenges in the market environment, Hong Kong's industrial and logistics sectors demonstrated resilience in 2025, benefiting from stable growth in foreign trade. Leasing momentum has been moderate, with operators continuing to focus on cost control, but high-quality assets remain attractive. Looking ahead to 2026, while some businesses will still focus on costs, the firm predicts that leasing demand will gradually improve, driven by pre-leasing activities in high-quality warehouses dominated by emerging industry demands and quality upgrades. Warehouse rents are expected to decrease by around 5% in 2026. In the fourth quarter of 2025, commercial real estate investments in Hong Kong (transactions exceeding HK$77 million, excluding government land sales, equity transactions, and internal transactions) increased by 130% quarter-on-quarter to reach HK$20.3 billion, the highest quarterly total in nearly three years; the total for the year reached HK$44.5 billion, a 3% year-on-year increase. The market was dominated by self-use buyers, accounting for 79% of the total investment in the fourth quarter. Mainland Chinese companies actively acquired office properties to support their business expansion in Hong Kong and internationally. For example, Alibaba Group and Ant Group acquired 13 floors of One Causeway Bay on Hong Kong Island for HK$7.2 billion, and JD.com acquired a 50% stake in China Construction Bank Corporation's building for HK$3.5 billion. Local educational institutions also continued to expand, with the City University of Hong Kong purchasing part of an office building in Kowloon Tong for HK$2 billion. Kelvin Chan, Head of Capital Markets at CBRE Hong Kong, stated that the commercial real estate investment market in Hong Kong in 2025 showed a cautiously optimistic attitude. Despite limited interest rate cuts and continued funding gaps, market activity is gradually improving. Self-use buyers dominate the market with acquisitions and selective asset portfolio transactions, with investors focusing on high-quality assets and value-added opportunities, particularly in the hotel, education, and financial sectors. Looking ahead to 2026, further expectations of interest rate cuts will drive demand, institutional investors will gradually return, and mainland funds will remain active. Accommodation assets and corporate headquarters are expected to be the focus of the market, with investment expected to grow moderately by around 5% in 2026.