Investors can expect distressed opportunities in Hong Kong – CBRE

Hotel transactions in Hong Kong increase despite a 66 percent drop in room occupancy rates amid political unrest in August.

The third quarter of 2019 saw the lowest commercial real estate transaction volume in Hong Kong since 2017, largely due to the ongoing anti-government protests and US-China trade conflicts, according to data from real estate brokerage firm CBRE.

The city recorded a total transaction volume of HK$18 billion ($2.3 billion, €2.09 billion) in Q3 2019, representing a 19 percent drop from the previous quarter. Hong Kong investors led more than half of the purchasing activities during this period, followed by Chinese investors who took up around 30 percent of the transaction volume.

Reeves Yan, head of capital markets at CBRE Hong Kong, told PERE that domestic investors, including family offices, developers and high-net-worth individuals, seem to have a better understanding of the Hong Kong market. They are confident in the ability of the city’s property market to recover, given that it bounced back from both the Asia financial crisis in 1997 and SARS health crisis in 2003. Many affluent Hong Kong investors made huge profits from buying during those crises and they see difficult times as a window of opportunity for acquiring assets, according to Yan.

In addition, Yan expects potential distressed opportunities to emerge in the office sector while Chinese investors consider offloading assets for liquidity during a potential downturn. He has seen a general 10 to 15 percent discount across all property types from peak pricing levels early this year.

Although local buyers are relatively more active than their foreign counterparts, investor sentiment in the market remains weak, according to Yan. Ratings agency S&P Global noted in an October report that there had been forfeited deposits and failed auctions for commercial land recently.

In terms of sectors, Yan pointed out that retail would suffer the most – the sector recorded a transaction volume of HK$4.2 billion, a 33 percent drop from the previous quarter. And the “already low” figure was skewed by the purchase of a 55 percent stake in Yung Kee Restaurant in Central for HK$2.2 billion, according to CBRE. This decline occurred against the backdrop of retail sales in Hong Kong plunging 23 percent in August.

On the other hand, despite a 66 percent drop in the hotel occupancy rate in August due to the unrest, the hotel sector recorded the highest quarterly transaction volume over the past 24 months, according to data by provided by S&P and CBRE. Yan explained that the transaction volume in the hospitality sector has been supported by the concept of co-living. Some of the co-living operators are purchasing hotels and turning them into co-living space.

Yan expects the transaction volume will continue to be low in the fourth quarter as unrest in the city escalates. In addition, December has always been a quieter time in Hong Kong as many investors typically take a “hold-and-see” attitude until the first quarter.