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Is Hong Kong is poised for a real estate resurgence?

Two years ago, Hong Kong was the world’s third largest real estate market, trailing only New York and London. The twin challenges of protests and a pandemic have taken their toll. So last week, Yardi called in the experts for their take on Hong Kong’s future.

Is Hong Kong is poised for a real estate resurgence?

Two years ago, Hong Kong was the world’s third largest real estate market, trailing only New York and London. The twin challenges of protests and a pandemic have taken their toll. So last week, Yardi called in the experts for their take on Hong Kong’s future.

David Green-Morgan, Managing Director Real Capital Analytics in Asia Pacific, Tommy Wu, Lead Economist for Oxford Economics in Asia, and Yardi’s Regional Director, Bernie Devine joined us for the first instalment of Yardi’s Executive Briefing Series for 2021. And here’s why they think Hong Kong real estate is ready to bounce back.

• The macro indicators are positive

Political unrest had already damaged Hong Kong’s economy prior to Covid-19, and a 6% contraction followed in 2020, Wu told Yardi’s engaged audience. But Oxford Economics is forecasting a strong recovery, with 4% growth in 2021, and then 2.5% annually out to 2025. All the macro indicators bode well, Devine added, pointing to the vaccine rollout, slowly improving retail performance and unemployment rate, as well as the city’s strong financial governance framework, which remains a source of competitive advantage.

• Office’s bumpy ride is over

Political protests had a greater impact on Hong Kong’s commercial office sector than the global pandemic, Wu highlighted. Office prices fell during the protests, but the market is “bottoming out” and demand is returning. Green-Morgan agreed, pointing to recent deals struck at the 73-storey skyscraper at 99 Queens Road, The Center, which were “more or less on par” with 2018 prices.

“Quite a few multinationals have been shifting business functions to other key cities in Asia – like Singapore and Kuala Lumpur – but they are still keeping their offices in Hong Kong,” Wu added. Oxford Economics expects the financial sector “to continue to thrive” and the tech sector, while small, will be a powerful engine for growth. Hong Kong remains “the gateway in and out of China”.

• Residential remains resilient

While Covid-19 hurt the labour market, and unemployment currently sits at 7%, this has not affected housing demand, Wu said. Why is this? Most participants in the housing market are in the financial and other high-paying sectors, and these weren’t hit hardest by Covid. “The real impact on Hong Kong was the protests. In fact, Covid has had hardly any impact on property prices, when you take a high-level view,” Devine observed.

Will migration, especially from those who hold British National Overseas passports, affect the housing market? Wu pointed out that the bulk of these migrants are young and footloose, but not asset-rich and were unlikely to be in the market for housing. Meanwhile land supply will remain “tight – at least over the next few years,” Wu added.

• Risk and rewards in restructured retail

Retail could take some time to recover, and Oxford Economics does not expect to see a repeat performance of the bounce back in 2003, following SARS. This marked a golden decade for retail and China’s emergence as a “major force” in tourism. “This won’t happen again,” Wu warned.

More than 80% of inbound tourists hail from China, but the falling price of luxury goods in China has eroded Hong Kong’s appeal as a shopping destination. Tourism is now at a “crossroads,” Wu added. Recovery in tourist arrivals will lag other nearby cities, and this will lead to “structural change” in retail.

While Hong Kong has some of the highest rents in the world, and while yields have been “incredibly low” in recent years, some investors are beginning to take a punt on the return of Chinese tourism. “This is the big unknown,” but prices are now low enough “that people are willing to take a bet,” Green-Morgan added.

• Hong Kong stays strong

“The last two years have been a real challenge for Hong Kong, but overall investor sentiment towards the city is becoming more positive,” Green-Morgan said. Despite recent declines, “Hong Kong is still one of the most investable cities in the region, and indeed the world”.

Hong Kong’s performance over the last decade has shown “some of the strongest price growth markets in the world”, and is bested only by Tokyo, Seoul and Shanghai for investment.

According to Real Capital Analytics data, a massive $50.3 billion in cash was splashed on property throughout the Asia Pacific region in the last quarter of 2020. Hong Kong’s 171% increase in transaction volumes year-on-year was “a big reason why the region as a whole did so well,” Green-Morgan explained.

• A new wave of capital is coming

Real estate investment trusts came under “huge pressure” in 2020, posting 30-40% price declines, Green-Morgan explained. Some of that has been “clawed back”, although retail REITs are “still being quite badly beaten up”.

But Hong Kong and China will continue to be “major players” and an important source of capital around the world, with $10 billion of Chinese and Hong Kong capital flowing out in 2020 alone. Our experts pointed to Link REIT, Asia’s largest REIT in terms of market capitalization, as just one example of investors on the hunt for premium-grade assets.

Private equity, pension funds and sovereign wealth funds are those with the “big war chests at the moment,” Green-Morgan explained, and have real estate in their sights. Expect some “big deals on the horizon,” he said.

If you missed Yardi’s Hong Kong market update, don’t skip our insights into Singapore and Malaysia on 21 April, and Australia and New Zealand on 28 April. Click Here to register.

• The aggregate performance of closed- and open-end real estate funds in the U.S. was strikingly similar in recent years, despite large differences in their strategic focus and the roles they play in institutional portfolios.
• How investors timed their commitments to closed-end funds, as well as how managers drew down and returned capital to investors, contributed toward money-weighted returns that were 2 percentage points higher than their equivalent time-weighted returns.
• Performance dispersion across closed-end funds created opportunity for investors able to select top-quartile managers, but even those making a large number of commitments potentially faced a wide range of portfolio returns.

• The aggregate performance of closed- and open-end real estate funds in the U.S. was strikingly similar in recent years, despite large differences in their strategic focus and the roles they play in institutional portfolios.
• How investors timed their commitments to closed-end funds, as well as how managers drew down and returned capital to investors, contributed toward money-weighted returns that were 2 percentage points higher than their equivalent time-weighted returns.
• Performance dispersion across closed-end funds created opportunity for investors able to select top-quartile managers, but even those making a large number of commitments potentially faced a wide range of portfolio returns.

To Read More visit: https://www.msci.com/www/blog-posts/open-vs-closed-end-real-estate/02413249714

With new demand continuing to be led by the technology sector, tightening vacancy to 5.0% from 5.2% in Q4 2020, Colliers recommend occupiers to lock in leases early as rents hit an inflection point. Owners should redevelop older properties into mixed-use developments to unlock value.

Report highlights:

• CBD Grade A rents stabilised at SGD9.54 per sq ft (-0.3%QOQ) in Q1 2021, as net absorption turned positive after two consecutive quarters of contraction.
• New demand continued to be led bythe technology sector, tightening vacancy to 5.0% from 5.2% in Q4 2020.
• Total office or mixed office investment volumes rose 13.9% YOY to SGD850 million in Q1 2021, as confidence returned with the global vaccine roll-out. 

MANUFACTURING DRIVES INDUSTRIAL SECTOR REBOUND

• According to the Ministry of Trade and Industry (MTI), Singapore’s economy contracted by 2.4% year-on-year (y-o-y) in Q4 2020, bringing the total change in the overall economic growth in 2020 to a negative 5.4%. In a COVID-19 year, the resilient manufacturing sector played a huge role in cushioning the fallout on the economy, with substantial output expansions in the electronics, biomedical manufacturing and precision engineering clusters.

• Demand for electronics remains high due to the current global chip shortage. And with Singapore as a major manufacturer of semiconductors, chipmakers in the industrial sector may be compelled to expand existing facilities in order to increase output production.

• In March 2021, the Singapore Purchasing Manager’s Index (PMI) reported an expansion of 50.8, the highest since March 2019. The optimism among manufacturers prevailed in January and February where the PMI expanded by 50.7 and 50.5 respectively, indicating that the industrial sector is likely to see continued growth in 2021.

Recommendations and Insights 

We expect office rents and prices to remain under pressure in H1 2021 before bottoming out mid-year, followed by a more stable H2 before rebounding again from 2022 onwards, assuming that Covid is under control within the first half of 2021. We believe that now is a good time for buyers to explore opportunities in the strata-title office sector:

• End-users with long term real estate needs should explore acquisition options, as office prices and rents could rebound quickly in core locations once the market recovers.
• Investors pursuing office sector exposure in Hong Kong, but had previously found it too expensive, should seize this window of opportunity to enter the market.
• Investors looking for offices with smaller lumpsum transaction values should consider areas in Kowloon, which offers more options and attractive pricing.