For the past 10 weeks, Hong Kong has been rocked by unprecedented levels of civil unrest with standoffs between demonstrators and riot police plunging parts of the semi-autonomous city into chaos. At the time of writing, the protests show no signs of abating. In fact, tensions have only increased after China’s top policy official issued a harsh warning to the protestors this week, warning them “not to play with fire”.
Such political instability in the Asian financial center, coupled with the ongoing US-China trade war, has predictably roiled financial markets. Here are five fall-outs for the real estate industry since the protests began.
1. Within days of the onset of the protests, logistics specialist e-Shang Redwood decided to postpone its highly publicized Hong Kong IPO of between $1.16 billion and $1.24 billion in mid-June, citing market conditions.
2. Performance of Hong Kong REITs has been lagging other Asian markets. Hong Kong REITs fell 6.3 percent in July – the biggest drop compared with Singapore, Australia and Japanese REITs – while the city’s broader equities market dropped 3.3 percent, according to the Global Property Research/APREA Composite REIT Index data published by the information provider REIT AsiaPac. The poor performance continues. As of early August, Hong Kong REITs had fallen 4.69 percent.
3. Commercial property investment volumes declined too. Deals worth HK$10 million ($1.3 million; €1.1 million) or more totaled HK21.1 billion in Q2 2019, a 6.2 percent quarter-on-quarter decline and the second lowest quarterly total since Q2 2016, according to data from global property broker CBRE. Some firms have even walked away from deals. In June, Hong Kong-listed developer Goldin Financial Holdings forfeited a $25 million deposit for its record land purchase of a commercial site on the former runway of Hong Kong’s Kai Tak airport for HK$11.1 billion, citing social unrest and economic instability.
4. Valuations of other highly sought-after assets have also been impacted. The Hong Kong government’s sale of a land parcel in Kai Tak, pegged as the biggest residential plot to be sold in the former airport area, was done at a discount to valuations in late July. According to the Lands Department, a consortium of developers including China Overseas Land & Investment, Wheelock Properties and K Wah International Holdings paid HK$12.74 billion for the site that has a gross floor area of 1.08 million square feet. However, the winning bid was lower than the expected price of between HK$13 billion to HK$16.1 billion, according to the South China Morning Post.
5. The negative sentiment has spread to the office and retail sectors. Leasing demand for Grade A offices, already subdued due to the trade war, is worsening further with vacancy rates in Greater Central increasing to 2.3 percent in Q2 2019, the highest since Q1 2015, according to CBRE.
Naturally, not everyone predicts a gloom and doom scenario. At a media briefing this week, an executive from Chicago-headquartered manager LaSalle Investment Management explained how protests in the past have made only a short-term impact on Hong Kong property prices. Take the 2014 Umbrella Movement. Data from JLL show office rents ended up rising by 0.2 percent after the first month of the protests, while retail sales also recorded a 2.8 percent year-on-year increase in the entire fourth quarter of 2014.
The immediate outcome of these protests will understandably be one of caution among investors looking at Hong Kong. But the degree of impact will depend on how long the disruptions continue and, crucially, how Beijing reacts. For now the People’s Liberation Army has not been deployed to assist or takeover from Hong Kong’s police. Should that happen, the city-state could be kissing goodbye to a one country, two systems set-up. In that event, the fallout for real estate investing, alongside other business, will be somewhat more radical.
Write to the author Arshiya Khullar at firstname.lastname@example.org. Additional reporting by Christie Ou.
PERE maps the private markets landscape through its database of investors, managers, and intermediaries. Click here to update or view information on your firm, or to be added to our database. Requests are forwarded to PERE’s Research & Analytics team: email@example.com
Photo Credit: LewisTsePuiLung/Getty Images