Overseas investment into Hong Kong commercial real estate has dropped off completely this year, apart from flows from China, while local Hong Kong institutions and wealthy individuals are increasingly moving funds into foreign property, amid rising turmoil and uncertainty in the territory.
The amount of capital coming in from the mainland also been falling. Chinese investors allocated an estimated $1.49 billion into Hong Kong real estate overall in the first half of 2020, down from $2.16 billion in the same period last year, according to data from Real Capital Analytics. The figure stood at $2.96 billion for the whole of 2019 and $6.45 billion the year before.
“Based on RCA’s latest data, cross-border deals [in Hong Kong] to date [this year to the end of June] have been driven more by Chinese capital,” said Chua Yang Liang, head of group research and strategy at Singapore real estate investment giant ARA Asset Management. “European and American investors would appear to have stayed away due to the social and political uncertainties, as you would expect.”
On June 30 Beijing imposed a national security law on Hong Kong, which bans sedition, secession and treason against China, crimes that could potentially spell a life sentence not only for residents of the city but also visitors. Critics say the bill strips the territory of its autonomy and civil and social freedoms, threatens its status as Asia’s premium financial hub and cements Beijing’s authoritarian rule there.
In the first half of the year, Hong Kong's economy suffered a double-whammy of the Covid-19 lockdown and a resurgence of protests ahead of the introduction of the new law. Moreover, trade and political tensions have been steadily rising between China and other countries – most notably the US – over the past two years.
Hong Kong's office market has suffered especially. In the first quarter of 2020 it saw inflows of $93 million, just 7% of the $1.3 billion for the same period last year, according to RCA. Total inflows last year were $7.5 billion, half the $14.8 billion in 2018. RCA could not yet provide second-quarter data for the office market this year.
Low transaction volumes are likely to be "the new normal" for many months at least, suggested Allan Lee, managing director of Hong Kong-based real estate investment firm Pamfleet.
Meanwhile, Hong Kong-based investors have been seeking more overseas property in the past 18 months, particularly in 2019. Last year saw $12.11 billion of outbound institutional and private wealth flows from the territory into global commercial real estate deals (including senior housing), up from $7.93 billion in 2018, by RCA data.
The outflows are not so pronounced this year, but they did rise to $1.28 billion in the second quarter from $973.2 million in the first.
Even as Asia-based private wealth clients’ investments into global commercial real estate overall fell by 49% year-on-year in the first half of 2020 to $12.48 billion, wealthy Hong Kong buyers were still active in international property, said Singapore-based Neil Brookes, head of capital markets for Asia Pacific at property broker Knight Frank.
Of the enquiries about international real estate that Knight Frank has received from private clients in Asia Pacific this year, some 65% have come from Hong Kong, he told AsianInvestor.
Many local investors are seeking to diversify their holdings into markets such as Australia, the UK and the US, Brookes said. Those three countries have – among others – expressed support for Hong Kong and criticised the imposition of the security law. The UK has offered a possible route to British citizenship for some 3 million Hongkongers, while Australia is considering a similar move.
Meanwhile, allocators in the Chinese territory have not been deterred by the travel restrictions put in place to curb the spread of coronavirus.
“We have seen an increase in joint ventures being formed between local investment managers and offshore equity sources,” Brookes told AsianInvestor. Such arrangements allow foreign investors to access local market expertise. He estimated that capital invested through JVs in Asia Pacific has increased by 250% year-on-year in the first-half of 2020.
FLIGHT TO SAFETY
The US-China tensions have also contributed to Asian's general capital flight towards safe-haven real estate investment destinations, such as the Australia, Japan, the UK and the US, Brookes added.
“In times of substantial volatility, many investors are keen to buy tangible assets,” he said. Knight Frank has observed a substantial rise in demand for properties leased on long-term contracts to governments and other creditworthy tenants. “At the same time, many companies are looking at sale-and-leaseback options as a way of raising liquidity and strengthening their balance sheet,” he said.
Knight Frank’s latest data also revealed that Asia’s wealthy are increasingly putting capital into commercial real estate rather than just residential properties.
Private wealth was responsible for $333 billion of commercial real estate purchases globally in 2019, a 5% rise on the previous year. Between end-2017 and end-2019, wealthy individuals in Asia Pacific increased their investment into commercial property globally by 69%.
“Many family offices pool their capital with other ultra-high-net-worth individuals and retain investment professionals to acquire assets and provide asset management,” said Brookes. “This pooling of resources allows management costs to be spread across several investors and larger lot sizes to be secured.”
They typically fund acquisitions using local debt sourced in the market where they are acquiring, in order to mitigate currency movements, he added.