HONG KONG – END OF AN ERA?
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With the Chinese economic slowdown continuing, the question rises whether China can still be a key driver behind the growth of Hong Kong’s property market. Cityscape investigates.
Two words usually come to mind immediately when thinking about property in Hong Kong: Expensive and highly sought-after.
For almost a decade now the Hong Kong property market has been the world’s most highly priced market. Here, the median home costs 19 times the median annual pretax household income, says a recent Demographia International Housing Affordability Survey, making it the least affordable city to buy a home globally.
For years Hong Kong has been on top of the list for international real estate investors looking to capitalise on the immense opportunities Hong Kong offers as the gateway to mainland China with a stable, business-friendly and cosmopolitan environment.
But things could be looking to change.
As China enters a new stage of slower economic growth, the question raises about the long term implications this may have on Hong Kong’s economy and property market given the city’s dependence on demand coming from north of the border – China.
In a recent published paper titled Past, present, future: China’s role in driving the growth of Hong Kong’s property market, JLL reviews how the reach of China’s influence has spread across the four core sectors of the Hong Kong property market – office, retail, industrial and residential – highlighting the key trends that JLL believes will emerge over the mid-to-longer term as changes in China’s economy take hold.
“Hong Kong’s growth prospects are inherently tied to the ebbs and flows of the global economy. Historically, this meant that the city took its economic cues from the U.S., the traditional bellwether
for the global economy. But the rise of China into a global economic powerhouse has caused a growing shift in external influence away from the U.S. and towards China. Today, China’s significance on Hong Kong’s economy is immense, with the city increasingly dependent on demand from mainland companies, investors, visitors and trade flow,” the JLL paper states.
“As China has grown, so too has its impact on Hong Kong’s property market. The retail sector has become highly dependent on mainland shoppers. Demand for office space is increasingly being underpinned by mainland corporates. Cross-border trade remains the lynchpin of the city’s warehouse sector, while mainland participation in the residential property market is slowly transitioning from one of a buyer to that of a developer,” the paper further reads.
Let’s look at the four different asset classes analysed by JLL in more detail and see how they are being affected by the Chinese downturn.
With ever more Chinese firms establishing presence in Hong Kong, the demand for office space from mainland corporates has been steadily rising. According to JLL, mainland corporates have helped drive rental growth in the city’s core business district, especially since the European sovereign debt crisis. With China’s economy starting to slow and its financial markets showing increased volatility, there is growing concern whether demand from the mainland will be sustained.
However, JLL claims that as a regional financial and legal hub, Hong Kong plays a pivotal role in providing the professional services needed by mainland corporates to step foot into global markets, a trend that JLL believe is only just getting started.
In recent years, Hong Kong has enjoyed unprecedented support from the mainland government, often getting a head start over other cities in the region when new liberalisation policies have been rolled out, including the development of the offshore renminbi market, the expansion Hong Kong’s Free Trade Agreement with the mainland, the roll-out of the StockConnect Pilot Programme and the Mutual Funds Recognition Scheme.
Against this backdrop, JLL remains confident that mainland corporates will continue to play a pivotal role in not only the short term, but also the long-term growth of the city’s office markets. The growing presence of mainland corporates in turn will serve as a catalyst to attract more foreign companies to establish or grow operations in the city.
Demand from PRC companies is set to continue while government policies will continue to support the growth of PRC companies in Hong Kong, says JLL.
David Ji, Head of Research & Consultancy, Greater China, Knight Frank, agrees. He adds that Hong Kong’s positive office performance is driven by limited supply (no new Grade-A office supply in Central in the past two years and only 160,000 sq ft from 2016 to 2020) and continuing strong demand from mainland companies. “Hong Kong has an important position as Asia’s premier financial centre and [hence there is] consequent strong tenant demand,” Ji says.
The growth of Hong Kong’s retail sector over the past 10 years has been driven, in significant part, by the rapid expansion of the inbound mainland tourism market. From 2006 to 2015, mainland arrivals increased by three-fold, raising their share of the city’s tourism market from about 54% to 77% over the period, says JLL’s report.
In 2015, mainland shoppers accounted for roughly a third of total retail sales for the year, which illustrates the importance Chinese visitors have for the local retail market.
The growth has however started to ease, especially with regards to luxury items. According to JLL, the pullback in mainland tourists has been driven by a combination of tighter entry visa restrictions, structural changes in the mainland’s outbound tourism market and an aggressive anti-graft campaign in China that has reined in exuberant consumption.
According to Knight Frank’s David Ji, the readjustment process is expected to continue this year. “Retailers will focus on local residents and other overseas tourists. Luxury brand retailers will remain cautious in expansion and focus on adjusting their retail network. Meanwhile demand now mainly drives the mid-end market. Rents of prime street shops will continue to weaken this year while shopping centre rents will remain firm, with mild increments, especially those in non-core shopping areas focusing on mid-end products and necessities,” he says.
However JLL argues that some of the causes for the declining retail segment can be reversed. Hong Kong could ease or lift certain visitation restrictions that limit mainland visitors to the city. It could ease restrictions placed on multi-entry visas which would mean there is potential to bring back 5.4 million mainland tourists to the city and add about HKD 11 billion annually to the city’s retail market.
JLL’s long term outlook for the retail market says declining rents will open up more opportunities for local retailers and fast fashion and lifestyle store operators to secure prime retailing space. Furthermore, JLL expect mainland tourists will continue to be a steady driver of retail sales growth, with a shifting focus away from luxury goods towards more affordable luxury and mass market products.
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