A view of commercial buildings in Central. Despite the mainland economy reopening following the lifting of the zero-Covid policy and the start of a return to the pre-pandemic normal, Hong Kong’s property market has yet to see the fruits of a recovery. Photo: Dickson Lee
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro
Why Hong Kong property market still faces a long, hard slog to recovery
The much-anticipated reopening of China’s economy after the pandemic has not translated into a steady upturn for Hong Kong’s property market
The city’s ability to bounce back from previous crises offers hope, but patience is essential while the recovery tries to take root
They say patience is a virtue. This is certainly true when it comes to the elusive recovery in Hong Kong’s real estate sector. When Beijing abruptly ditched its zero-Covid policy last December, putting an end to three years of self-imposed isolation, some property advisers believed the crucial catalyst for an improvement in sentiment had finally materialised following a succession of domestic and external shocks dating back to 2019.
For a while, there were signs that the city’s property market was firmly on the road to recovery. The Centa-City Leading Index, a gauge of secondary home values, rose 7 per cent in the first quarter of this year after a 14.5 per cent decline in 2022, while gross leasing volumes of grade A office space reached their third-highest quarterly level since the pandemic erupted, according to CBRE.
However, even the crucial reopening of China’s economy has failed to turn the green shoots into a sustainable upturn. While few expected a rapid, V-shaped recovery given the acute vulnerabilities in the global economy, the performance of Hong Kong’s property market in the first half of this year can best be described as a cross between a drawn-out U-shaped recovery and a faltering, W-shaped one.
In the residential market, secondary home values fell 2.6 per cent in the second quarter. Moreover, the total number of transactions in the secondary and primary markets last month dropped to 3,613 compared with 6,690 in March, according to Cushman & Wakefield.
The prime culprit is the renewed spike in the one-month Hibor rate. The main reference rate for mortgage loans has surged from close to 2 per cent in mid-February to 5.2 per cent, its highest level since 2007.
The abrupt tightening in liquidity, which has led to a further increase in mortgage rates, underscores the enduring problem facing property markets the world over. There is persistent uncertainty over the direction of interest rates, particularly in the United States, where markets underestimated the Federal Reserve’s resolve to tighten policy aggressively even at the risk of inducing a recession.
In Hong Kong, the sharper-than-expected rise in borrowing costs is exacerbated by the much weaker-than-anticipated recovery in China’s economy. This is particularly apparent in the commercial property sector, especially in the office and investment markets, where the adverse effects are most pronounced.
According to a presentation by CBRE on July 10, the increase in commercial property loan rates last quarter caused the spread between the cost of debt and rental yields to fall deeper into negative territory.
The relative unattractiveness of real estate assets contributed to the lowest transaction volumes for the first half of a year since 2009. The share of mainland Chinese investment, moreover, plunged to its lowest level since the first half of 2015. “It feels like everyone has hit the skids,” said Tom Gaffney, regional managing director at CBRE in Hong Kong.
Advertisements for factory and office renting are posted on a wall in the industrial area of Kwun Tong. Photo: K.Y. Cheng
In the office market, while gross leasing volumes have picked up significantly, net take-up swung back into negative territory last quarter because of insufficient new demand to compensate for the large amount of space surrendered. This pushed up the vacancy rate to a record 15.7 per cent.
Rents fell for the 17th consecutive quarter and are unlikely to rise any time soon amid a combination of weak demand and the recent surge in supply. The bright spot, however, is the retail sector, which was always going to be the biggest beneficiary of the unsealing of the border with the mainland.
According to CBRE, leasing activity enjoyed its strongest first half of the year since 2010, driven by strong demand from food and beverage operators and cosmetics brands. Vacancy rates have fallen sharply while high-street rents rose 3.1 per cent in the first half of this year following several years of steep declines.
Yet, even in the retail market, there are drags on growth. The daily average of mainland Chinese visitor arrivals in the six weeks up until the end of June was only 55 per cent of 2017-19 levels, CBRE noted. Meanwhile, a surge in outbound travel since the start of this year has resulted in a “leakage of domestic spending”, according to JLL.
Furthermore, mainland Chinese tourists – who now have more options for luxury purchases in their domestic market – are more discerning and are seeking new experiences as opposed to just shopping and dining in traditional locations. “It’s not the same mainlander as before,” said Nick Bradstreet, head of Asia-Pacific retail at Savills. On the other hand, the retail sector has finally “hit a bottom and there’s light at the end of the tunnel”, Bradstreet said.
There are grounds for optimism about Hong Kong’s property market, particularly from a tenant’s perspective. High street rents have not been this low since the 2003 severe acute respiratory syndrome epidemic, while office rents are more than 30 per cent below their peak in 2019. Moreover, the city is well-placed to benefit from a shift in sentiment triggered by more forceful stimulus in China and strong signs that interest rates have peaked.
What is clear, however, is that the recovery has yet to take hold. “It has been four long years, but never turn your back on Hong Kong,” Gaffney said. Given the city’s ability to bounce back from previous crises, there are reasons to be sanguine, but the fact remains that the long-awaited recovery still needs to take root.
