Hong Kong faces a unique set of problems. Coronavirus followed six months of political unrest and violence, as popular protests against a now-shelved extradition law with mainland China became smaller, often violent, protests by young activists. Prior to this, the retail sector had been on the slide since 2014 due to lower spending from Chinese tourists.
The city has not suffered a total lockdown, though schools have been closed until after Easter, and most people have continued to work almost as normal. However, the closure of the border with mainland China has crippled the hospitality industry, with single-figure occupancy rates. The government has announced a series of moves to support SMEs, especially in the retail and F&B sectors, and plans to give HK$10,000 ($1,287; €1,173) to every permanent resident to stimulate the economy.
The protests began to affect real estate in the latter part of 2019. Cushman & Wakefield data show office rents fell 2.5 percent city-wide and 6.9 percent quarter-on-quarter in the Central office district in the fourth quarter. The broker predicts a further fall in the overall market of 10-15 percent this year, and 13-18 percent in Central.
Meanwhile, retail rents in the prime shopping district of Causeway Bay fell 13.9 percent in the last quarter of 2019 to reach a 10-year low. Rents in prime retail districts will fall a further 10-15 percent in the first half of this year, Cushman predicts. Investment volumes (deals above HK$100 million) also fell to a decade low of HK$46.93 billion, just 30 percent of the five-year quarterly average.
A strong local listed and private investor market means fewer institutional investors are active in Hong Kong, although it has been a target for China and pan-Asia funds. The political upheaval has been a headache for investment managers, as some LPs, especially those from the US, have designated Hong Kong as an oppressive government and thus somewhere they will not invest for ethical reasons.
The real estate community has been stoic, not least because it’s been here before with the 2003 SARS epidemic. And the Hong Kong economy was stronger prior to the coronavirus than in the run-up to SARS, says Andrew Moore, chief executive of Hong Kong-based investment manager Pamfleet.
“SARS came only a couple of years after the bursting of the dotcom bubble and only five years after the Asian financial crisis, so the economy was severely weakened,” says Moore. “Prior to the coronavirus, the economy was in good shape, with very low unemployment. The retail sector, which had been suffering anyway, was affected by the protests, but the office, logistics and residential markets had kept on rising.”
So far, Hong Kong real estate professionals expect the coronavirus to behave like SARS, with a sharp dip in activity, followed by a strong recovery once the virus dissipates in warmer weather.
There have been a number of distressed asset sales, mainly by over-leveraged residential investors, but the investment market is largely stalled, say brokers. Moore says: “Most Hong Kong real estate investors are low-geared and under no pressure to sell. They are particularly reluctant to sell because everyone remembers SARS and the huge gains made when the market started to recover.”
The first question for investors is whether the recovery will follow the same pattern as SARS. Simon Smith, head of Asia-Pacific research at Savills, says: “If this outbreak is similar, we can expect the worst economic damage to occur over the first half of the year, with a swift recovery in the second.
“However, a lot depends on how you model the recovery phase, whether it’s a ‘V,’ a ‘U’ or an ‘L’. As businesses return to work and financial markets right themselves, a second half pull back is possible but is now looking less likely due to the spread of the virus elsewhere and the impact on the global economy. The critical variable at the moment is how covid-19 impacts European and North American economies at a time when the outbreak seems to be stabilizing in Greater China.”
The second question is whether the protests and violence will resume again in the summer or when the the virus recedes. Opinion is divided on this; many expats in the real estate business are gloomy about Hong Kong’s prospects as they see no change of rapprochement between government and protestors. Intermittent protests could permanently reduce mainland China visitor numbers and subdue the retail and hospitality
However, others believe a political settlement is around the corner. Allan Lee, managing director at Pamfleet Hong Kong, expects reforms to be introduced prior to the Legislative Council elections in September, allowing voters more say, which will take the sting out of the protests. There are also plans to deliver more public and private housing, as housing affordability is the main gripe of the city’s residents.
He is sanguine about the post-recovery opportunities: “The difficulty is in finding a willing seller of an en-bloc asset.”
Yet he also notes that new capital is already circling the market: “We see new families and new funds in the market, while the previously active are not doing so much.”
In the longer term: “The key to Hong Kong’s future is integration with the rest of the Greater Bay Area, which opens up huge opportunities for individuals and businesses. The GBA needs Hong Kong’s legal and financial systems to speed up its reform and
Hong Kong is now linked to the Chinese mainland by high-speed rail networks that can take commuters to Guangzhou within an hour. Being part of the GBA effectively increases Hong Kong’s land mass. However, so far the public has been wary of the project and of further integration with China, even though it is enshrined in law.
Lee says: “Many of the real estate opportunities in Hong Kong going forward will be related to the GBA. There is a lot of growth there to exploit.”