When will Hong Kong catch a break? Ever since the trade war between the United States and China erupted in 2018, the city has faced a succession of domestic and external shocks that have inflicted grave damage on the economy, undermined confidence and exacerbated concerns about Hong Kong’s future as a financial hub.
A resilient recovery, let alone a sustainable one, has proved elusive. In the real estate industry, the downturn has deepened in parts of the market, resulting in some of the steepest declines in asset values on record. The Centaline City Leading Index, a gauge of secondary house prices, is down 26.3 per cent from its peak in August 2021, while transactions in the secondary and primary markets last year fell to their lowest level since 1991.
In the commercial property sector, grade A office rents have fallen by more than 35 per cent since their peak in 2019, while the overall vacancy rate has shot up to an all-time high of 16.9 per cent, up from less than 5 per cent in 2019.
In Hong Kong’s languishing commercial property investment market, there were only 48 deals in the first half of this year, the lowest level since the second half of 2008. Moreover, distressed sales accounted for nearly three-quarters of transaction volumes, according to data from CBRE.
The severity and prolonged duration of the downturn has alarmed many real estate experts in Hong Kong. Earlier this month, JLL urged the government to introduce relief measures in the residential market “to avoid the city repeating the downcycle witnessed between 1997 and 2003” following the Asian financial crisis.
While there is no sugar-coating the acute challenges facing Hong Kong’s property industry, the declines in asset values and the underlying fundamentals of the sector are not comparable to the scale of the damage wrought in the late 1990s. In the 12 months between October 1997 and October 1998, house prices had already fallen by more than 50 per cent.
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How Hong Kong’s housing market became among the world’s most unaffordable
How Hong Kong’s housing market became among the world’s most unaffordable
Given the more severe and simultaneous shocks Hong Kong has suffered in the last six years – including the trade war, the protest movement, the deadliest global pandemic since the 1918 Spanish influenza, China’s sharp economic slowdown and the fastest rise in global interest rates since the 1980s – home values have held up relatively well.
“Considering everything that has happened here in the last several years, a peak-to-trough fall of 26 per cent is, if anything, a sign of resilience,” said Buggle Lau Ka-fai, chief analyst at Midland Realty.
More importantly, the financial system is much stronger today. For starters, there is far less leverage than there was in 1997. The loan-to-deposit ratio then stood at a staggering 117 per cent, resulting in a brutal unwinding of leverage that exacerbated the fall in house prices. By 2006, the ratio had fallen to less than 80 per cent and has been relatively stable since. Only 34 per cent of homeowners had mortgages in 2021, compared with 52 per cent in 2001.
Moreover, despite the recent surge in negative equity, the delinquency rate on underwater mortgages is barely above zero, thanks to low unemployment, rising household incomes and strong macroprudential regulations. Although housing inventory levels have risen sharply in recent years, the annual increase in new supply is more constrained than in the years following the Asian financial crisis and, crucially, follows decades of persistent undersupply.
The clearest sign of resilience is in the rental market. Average monthly rents have recovered to pre-pandemic levels, underpinned by new visa schemes to attract top talent and an influx of foreign students. Rental yields are still below mortgage rates but helping support investment demand, especially when borrowing costs come down. “The rental market is the bright spot,” said Eddie Kwok, executive director of valuation and advisory services at CBRE in Hong Kong.
Residential buildings in Hong Kong, as seen on September 24 last year. Average monthly rents in Hong Kong have recovered to pre-pandemic levels, thanks to an influx of foreigners. Photo: Bloomberg
In the commercial property market, the steep decline in office rents has served as a crucial catalyst for leasing activity. In the first half of this year, leasing volumes reached their highest level since the first half of 2019. Tellingly, buildings completed after 2021 accounted for 39 per cent of leasing demand, according to CBRE data.
With a record share of vacant space, occupiers have a wider range of options to upgrade their real estate. Although few are expanding their office footprints, many are capitalising on the sharp fall in rents to move to districts where there are more high-quality buildings with plenty of amenities and strong environmental credentials.
That relocations have become a key driver of office leasing demand is a vote of confidence in Hong Kong. “This is a chance for large occupiers to grab high-quality space. In doing so, they’re also making a commitment to invest in Hong Kong,” said Alex Barnes, managing director for Hong Kong, Macau and Taiwan at JLL.
Workers leave their offices in Admiralty on June 4. Falling office rents in Hong Kong have driven some firms to relocate in search of higher-quality buildings with more amenities. Photo: Edmond So
Even in the city’s moribund commercial property investment market, the sharp increase in distressed sales this year could eventually draw in institutional investors, helping narrow the expectations gap between buyers and sellers and providing much-needed liquidity to a market that has failed to reprice.
Much needs to happen in order for Hong Kong’s property market to stabilise, let alone enjoy a durable recovery. The most important prerequisite is confidence, which means an end to the incessant shocks.
This is a tall order, not least given the treacherous geopolitical landscape. Yet for an industry that has proved more resilient than the bleak data suggests, there are grounds for optimism.
