Hong Kong IslandIn May, office tenants were generally taking a cautious market view and were withholding their leasing decisions amid escalating Sino-US trade war and the recent local political tensions. With leasing momentum continuing to weaken, Grade-A office rents in Central fell slightly by 1.0% month on month to HK$160 per sq ft. Transaction volume in the area was also impacted, with most of the deals recorded in the small or mid-scale level of below 15,000 sq ft.As concerns increase for economic uncertainties and rising vacancy in Central and Admiralty thanks to large decentralisation moves, rental growth in the CBD is expected to remain sluggish as both tenants and investors will remain cautious in the near term.KowloonIn contrast, the Grade-A office market in Kowloon was active in May, with the number of transactions soaring 65% month on month. Most of the deals were recorded in Kowloon East with an area of 6,0007,000 sq ft. In the first five months of 2019, half of the transactions over 20,000 sq ft were recorded in Kowloon East. Major demand was driven by shipping, logistics and electronics companies. One significant leasing deal recorded during the month was FT Life Insurance Companys letting of four floors, totalling 126,000 sq ft, in NEO in Kwun Tong. The company will lease the office space for a monthly rent of around HK$26$28 per sq ft, averaged after calculations of various incentives. It is noteworthy that landlords are divided in terms of attitudes and strategies to alleviate the negative factors. Some have remained firm in rents despite lingering trade war concerns. Other landlords have been wary of its impact on businesses in the area and started to provide more incentives to lease out vacant office space.TABLE 1Grade-A office market indicators (May 2019)Net effective rent ChangePrice(Gross) ChangeDistrictHK$ psf/ mthMoM %Yo Y %HK$ psfMoM %Yo Y %Premium Central 189.7 -1.8 -2.7 - - -Traditional Central 144.0 -0.4 3.0 - - -Overall Central 159.5 -1.0 0.7 43,907 0.4 2.5Admiralty 115.0 -0.7 -1.1 39,184 0.0 7. 2Sheung Wan 85.1 -1.0 0.5 34,341 0.8 1.0Wan Chai 78.9 0.8 -0.9 30,476 0.0 4.4Causeway Bay 81.0 -3.1 -3.1 26,409 0.0 4.4North Point 52.2 0.0 -3.5 - - -Quarry Bay 54.5 0.6 2.4 - - -Tsim Sha Tsui 71.6 0.0 4.0 18,140 0.4 2.6Cheung Sha Wan 33.3 0.0 2.2 - - -Hung Hom 44.3 0.0 -0.5 - - -Kowloon East 32.0 -0.1 -1.3 13,351 -0.6 1.4Mong Kok / Yau Ma Tei 60.2 0.0 2.1 - - -FIGURE 1Grade-A office prices and rentsRESEARCHHONG KONG MONTHLYJUNE 2019Source: Knight Frank ResearchSource: Knight Frank ResearchNote: Rents and prices are subject to revision.OFFICEMarket uncertainties dampen Central leasing momentum 2007 = 1002007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 201950150250350450Hong Kong Island price indexHong Kong Island rental indexKowloon price indexKowloon rental indexFollowing a strong rebound in Hong Kong's residential sales in March and April, sales volume only edged up slightly in May, increasing 4.9% MoM to 8,208 units, according to the Land Registry. The latest official data shows that overall residential property prices increased 3.2% MoM in April. Given the time lag, however, the official statistics has not fully reflected the latest market conditions. Owing to external uncertainties and the slowdown in local economic activity, it was reported that several banks lowered their mortgage valuations by 25%, especially for secondary homes in non-urban areas. Market sentiment has been downbeat since 10 May, when the US slapped new tariffs on China imports. The stock market indices dropped which in turn affected buying confidence. In view of the worsening macro environment, more and more buyers have adopted a wait-and-see attitude. There were 160 forfeitures of preliminary deposits in the first five months of the year, equivalent to about 70% of the total in 2018, according to market data. In a recent case at The Pavilia Hill in North Point, the buyer cancelled the transaction of a penthouse duplex unit, forfeiting the deposit of HK$7.55 million. Amid the exacerbated concerns about a global recession, there is expectation that the Fed will cut the interest rate at least twice by the end of the year. This could alleviate the upward pressure on Hong Kongs interest rates and support the existing low-mortgage-rate environment. Nevertheless, we expect that in the near term, the property market will be subdued because of low buyer confidence.TABLE 2Selected residential sales transactions (May 2019)District Building Tower / floor / unit Saleable area (sq ft)Price (HK$ million)Price (HK$ per sq ft)The Peak Mount Nicholson House 8,674 916 105,603The Peak Cameron House Low floor / unit B 2,659 280 105,303Island South 50 Stanley Village Road House 2,760 168.8 61,159Mid-Level Central May Tower Tower II / high floor 2,669 120 44,961Mid-Level Central Grenville House Block F / low floor 3,349 118 35,234TABLE 3Selected residential lease transactions (May 2019)District Building Tower / floor / unit Lettable area (sq ft)Monthly rent (HK$)Monthly rent(HK$ per sq ft)Mid-Level Central The Mayfair High floor / unit A 2,169 200,000 92Mid-Level West Seymour High floor / unit A 1,730 130,000 75Island South Ruby Court Block 1 / high floor 1,775 120,000 68Mid-Level East The Summit Low floor / unit B 2,389 145,000 61Mid-Level Central Garden Terrace Tower 3 / high floor / unit B 2,828 127,000 45FIGURE 2Luxury residential prices and rentsSource: Knight Frank ResearchSource: Knight Frank ResearchNote: All transactions are subject to confirmation.Source: Knight Frank ResearchNote: All transactions are subject to confirmation.RESIDENTIALExternal uncertainties cloud residential market outlookFIGURE 3Mass residential prices and rentsSource: Knight Frank Research2007 = 1002007 = 1002007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019507090110130150170190210Price IndexRental Index2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 201950100150200250300350400450Price IndexRental IndexHong Kongs retail sales fell for the third consecutive month in April. According to government figures, retail sales in April dropped 4.5% YoY in value, following a 0.2% fall in March, contributing to a 2.0% decline year to date. The jewellery, watches and luxury goods sector continued to see weak performance, with sales value plummeting 11.4% YoY. Weak retail sales figure reflects a still-cautious consumption sentiment amid the various external uncertainties. The challenging retail climate and deteriorating global outlook have promoted landlords to take a risk-off approach and offer steep rental concessions to attract tenants. A low floor unit in The Galleria, at 9 Queens Road Central, covering 6,500 sq ft with a 1,500-sq-ft rooftop flat, was leased to an F&B operator for a monthly rent of HK$150,000 or HK$23 per sq ft, much lower than the current market rent level. On the other hand, leasing momentum has slowed down in recent months, as retailers have adopted a very cautious approach to expansion, which has also exerted downward pressure on rents. In terms of business and operation strategies, many leading retailers have transformed and upgraded their businesses to face market headwinds. Harvey Nichols Hong Kong, for instance, will introduce a new format flagship store in Pacific Place in September 2019, with technology the core element in the shop. The new flagship store will showcase three times the offerings of the existing store, while reducing the size of the store by 50%.We expect the retail climate in the second half of the year to be largely impacted by the weak economic conditions caused by the US-China trade conflict. Locally, the current political upheaval may also have a longer-term impact on both sentiment and consumer spending. Even in the near term, Hong Kongs retail market is expected to face considerable headwinds. TABLE 4Retail sales by outlet type (Apr 2019)OutletValue(HK$ billion)Share of total %Change MoM %ChangeQoQ %Change YoY %Jewellery, watches and clocks, and valuable gifts5.9 15.5 -12.3 -30.5 -11.4Clothing, footwear and allied products5.2 13.9 -2.4 -16.8 -2.6Department stores 3.8 10.0 -11.1 -22.6 -4.3Fuel 0.8 2.2 0.0 6.9 3.2Food, alcoholic drinks and tobacco (excluding supermarkets)3.5 9.2 1.2 -26.5 0.8Consumer durable goods5.1 13.6 -10.0 -21.9 -10.5Supermarkets 4.2 11.1 -5.8 -12.9 1.1Others 9.3 24.6 2.4 -20.4 -2.3All retail outlets 37.7 100.0 -5.0 -21.5 -4.5FIGURE 4Retail sales and rents© Knight Frank 2019This document and the material contained in it is general information only and is subject to change without notice. All images are for illustration only. No representations or warranties of any nature whatsoever are given, intended or implied. Knight Frank will not be liable for negligence, or for any direct or indirect consequential losses or damages arising from the use of this information. You should satisfy yourself about the completeness or accuracy of any information or materials.This document and the material contained in it is the property of Knight Frank and is given to you on the understanding that such material and the ideas, concepts and proposals expressed in it are the intellectual property of Knight Frank and protected by copyright. It is understood that you may not use this material or any part of it for any reason other than the evaluation of the document unless we have entered into a further agreement for its use. This document is provided to you in confidence on the understanding it is not disclosed to anyone other than to your employees who need to evaluate it.RESEARCH & CONSULTANCYDavid Ji Director, Head of Research & Consultancy, Greater China +852 2846 9552 david.jihk.knightfrankCOMMERCIAL AGENCY Ross Criddle (S-356708) Executive Director Head of Global Corporate Services & Hong Kong Office Services +852 2846 9527 ross.criddlehk.knightfrank Patrick Mak (E-187858) Executive Director & General Manager Head of Kowloon Office Services +852 2846 0628 patrick.makhk.knightfrankRESIDENTIAL AGENCY Maggie Lee (E-076435) Senior Director Head of Residential Agency +852 2846 9550 maggie.leehk.knightfrankRETAIL SERVICES Helen Mak (E-087455) Senior Director Head of Retail Services +852 2846 9543 helen.makhk.knightfrankVALUATION & ADVISORY Thomas Lam (S-372521) Executive Director Head of Valuation & Advisory +852 2846 4819 thomas.lamhk.knightfrankSource: Knight Frank Research / Rating and Valuation Department / Census and Statistics DepartmentSource: Census and Statistics Department / Knight Frank ResearchIndex2006 1H=100Knight Frank Petty Limited EAA (Company) Lic No C-010431Knight Frank Hong Kong Limited EAA (Company) Lic No C-013197RETAIL Retail climate deteriorates amid adverse conditionsRetail SalesHK$ billion20032004200520062007200820092010 2011 2012 2013 2014 2015 2016 2017 201820191H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H2H1H050100150200250300050100150200250Retail Sales ValueKF Non-Core Shopping Centre Rental IndexKF Core Shopping Centre Rental IndexKF Prime Street Shop Rental IndexRVD Private Retail Rental Index