Understanding the "new normal" in the Hong Kong and Japan's commercial real estate market

15 December 2021 | Applicable law: Hong Kong, Japan

While the Covid-19 pandemic has given rise to a “new normal” in every industry and sector across the globe, its impact on the economies of individual countries has differed greatly. The commercial real estate market in Hong Kong and Japan have faced inevitable disruptions due to changes in business activity and the everyday lives of their citizens. This article will provide an overview of the shifts and developments in Hong Kong and Japan’s commercial real estate markets caused by the Covid-19 pandemic.

Hong Kong

The significant year-on-year GDP growth of 8% and 7.6% in the first two quarters of 2021 respectively has put an end to the negative GDP growth recorded in 2019 and 2020. Stringent pandemic restrictions and the near-absence of local COVID-19 cases have boosted market confidence, resulting in a gradual increase in property transaction volumes.

The widespread adoption of remote working and cost concerns have reduced the demand for vast office spaces, which has resulted in mass corporate downsizing and a preference for flexible term and shared office spaces. Further decline in rents are expected before a rebound in 2022. On the flip side, the lowered rent and increase in vacancies offer tenants a range of office relocation and restructuring options.

Owing to social distancing orders and travel restrictions, retailers have been cutting costs and raising profitability by scaling back their brick-and-mortar presence and improving their online sales channel. As rent in prime shopping areas have plunged to record lows since the 2003 SARS outbreak, retailers such as American Eagle Outfitters and Decathlon have absorbed vacancies that previously housed high-end luxury brands in anticipation of the reopening of the city’s borders and the recovery of the tourism industry.

The industrial sector bounced back faster than the other two commercial sectors, with its investment transactions accounting for a large percentage of commercial property transactions in 2021. The meteoric rise of e-commerce during the pandemic boosted demand for logistics, cold storage spaces, and warehouse facilities. Furthermore, given the rapid development of telecommunications and 5G technology, the need for instant data analytics, reliable internet and cloud services, and ample storage for data has further heightened the demand for and expansion of data centres.

The government has backed the commercial real estate market through various initiatives across different sectors. Most notably, the abolishment of Double Ad Valorem Stamp Duty in November 2020 and a 10% increase in loan-to-value ratio caps since August 2020 encourages purchasers to borrow more money to acquire non-residential properties. In addition, under a pilot scheme launched in March 2021 by the Lands Department, land premiums relating to lease modifications for the redevelopment of pre-1987 industrial buildings are now charged at standard rates. Finally, leasing and investment transactions have been stimulated by financial incentives and border control measures. While the Consumption Voucher Scheme has increased local consumption, mid-term plans for cross-border travel are facilitated by ongoing discussions between the Hong Kong, Chinese, and Macau governments.


Japan’s real estate market is one of the largest in the world by transaction size owing to a variety of factors, including the ability of foreigners to own freehold interests in land, Japan’s stable returns, and the low-risk investment environment. While the pandemic has affected the real estate market in Japan, its impact has not been as severe as in other countries that were hard-hit by COVID-19, such as the US and Europe. Investor demand in Japanese real estate remains strong as the market is generally considered an attractive option in times of instability and turmoil in the global market.

The commercial office sector in Japan was stagnant during 2020, with many owners opting to observe the market before making any significant moves. However, it appears that more assets are expected to enter the market in 2021 and beyond. The sector is projected to become more active as the COVID-19 pandemic continues to ease. With the increased adoption of remote working and an expected influx of vacant office spaces over the next few years, questions remain as to how rental rates and yields will be affected.

In contrast to the office sector, the pandemic has led to a rise in the demand for certain asset classes in Japan. Spurred on by the pandemic, the surge in e-commerce and remote working has created the need for large-scale, state-of-the-art logistics facilities and data centres. Several large-scale logistics facilities have been sold over the past year and more are expected to enter the market in the near future. Likewise, major data centre developers and operators have contracted to build several data centres and campuses in Japan. Demand for these asset classes is expected to continue to rise in the foreseeable future.

Other asset classes that have experienced a growth in demand over the past few years and are expected to continue to grow include: (i) multifamily residential portfolios, as they offer investors steady returns and a relatively low default rate, and (ii) student housing.

Finally, one segment of the market that remains small but is expected to grow exponentially is the ultra-luxury residential market, particularly in Tokyo and in ski resort regions such as Nagano and Hokkaido. Driven mainly by overseas ultra-high net worth individuals, this segment has begun to show signs of recovery from the effects of the pandemic and is expected to soar in demand.

On the whole, the real estate market in Japan remains vibrant. While uncertainty persists for other sectors that have been more adversely affected by the pandemic, such as retail and hospitality, traditional asset classes such as commercial offices are predicted to experience a definitive rebound. Investor optimism remains high for Japan’s real estate market and demand for a variety of asset classes should continue through the next few years.

Addressing the legal aspects of real estate transactions

We are witnessing the growth and recovery of two robust commercial real estate markets, but one should be mindful of the legal aspects involved before and after investment or leasing decisions. Interested investors should seek pre-acquisition legal advice to ensure that their position is tightly protected and to be aware of any mouse traps or complex governmental requirements. With the help of an experienced legal expert, companies will be well-positioned to maximise the advantages of the current market circumstances.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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