Hong Kong’s anti-China protests have now been going for fourth months, and one thing is crystal clear: they are bad news for the city’s property market.

In the third quarter, leasing demand for grade A office space has weakened, while in the residential market both transaction volumes and prices have fallen, according to research from property services firm Colliers.

The total number of residential transactions declined 40% quarter-on-quarter, while, grade A office rents, which were already declining, fell more sharply (by 2.4%) in the third quarter. Moreover, rents in the retail market dropped by 7%.

Accordingly, developers have taken a big hit. Shares in Swire, Sun Hung Kai and Henderson Land have shed 25.2%, 14.5% and 11.3% respectively, since a mob of gangsters attacked protesters in Yuen Long on July 21, marking a sharp escalation in the level of violence.

Admittedly, a correction was widely seen as long overdue. Hong Kong has been the world’s most expensive place to buy a home for nearly a decade, and regularly ranks at the top of the global list for office prices.

Indeed, real estate investment in the Chinese territory had already slumped by a third in the year to June 30 even before the protests really took hold, according to property services firm Cushman & Wakefield. All sectors were hit, bar hotels – perhaps surprisingly, given the reports of collapsing occupancy rates.

How long and deeply might Hong Kong’s property market suffer, and when will the time come to buy again? AsianInvestor put this question to three real estate experts.

Harry Tan, head of Asia-Pacific real estate research
Nuveen

There is strong pent-up dissatisfaction among the Hong Kong public over rising inequality and lack of policy initiatives to improve living standards. That was the case even before the recent heightened political worries arising from the extradition bill that has triggered the recent protests – which seem unlikely to be resolved quickly.

Harry Tan

As a result, the impact of an increasingly weak global growth outlook, particularly the uncertain growth in China, on top of the significant deterioration in domestic sentiment, will continue to drive a deep near-term contraction in real economic activity.

Accordingly, we are likely to see a multi-year pullback in housing prices [in Hong Kong]. From the current elevated levels, a peak-to-trough drop of around 30% is likely, and even then Hong Kong would remain one of the most expensive markets by all measures of affordability.

The commercial property market provides a more interesting investment proposition against the current backdrop.

Over the past few years there has been a shift in occupier and investment demand towards decentralised office markets such as Kowloon East. Central office rents have started to pull back given the recent downturn, and this will persist, especially as businesses re-adjust their expectations of Hong King’s longer-term outlook and the need to diversify away from the city.

Office rents in Central and other mature decentralised areas are likely to continue falling, over the near to medium term, by around 30% to 40%. This will provide good opportunities for investors to enter the market.

Catherine Chen, Greater China head of forecasting and capital markets research
Cushman & Wakefield

The slowing in investment activity in Hong Kong property in the year to June has been more a product of the market cycle, high prices and a lack of current stock than the more recent political tensions that have arisen.

Catherine Chen

More specifically, the following have had an impact, in order of declining importance:

the decline of investment activity from mainland Chinese investors partly due to China’s capital controls and partly due to less funding available as a result of credit tightening in their home market.

international institutional investors were actively seeking real estate in the city, but transaction volume was not as aggressive due to shortage of tradable en-bloc assets, especially in the core areas. 

while pricing remained high, the weakening of rental growth and rising vacancies in the office market in the first half has made investors more hesitant in closing deals.

All that being said, data for the third quarter does show an impact on sentiment and activity, as investors have moved to the sidelines in the face of increased social unrest. International capital is keenly aware that this uncertainty will hit business planning and short-term productivity and as a result, the appetite of cross-border buyers will continue to be restrained until these tensions ease.

Hence a fall in pricing of 10% to 15% over the next 12 to 15 months and a further drop in investment can be expected before the market stabilises. However once it does, the market fundamentals of low supply relative to demand will re-assert themselves quite quickly, assuming there is a clear path for the current political turmoil to be settled.

Sai Min-Chow, Asia-Pacific head of real estate investment research
Aberdeen Standard Investments

Since the protests broke out in June, home prices have fallen by about 5% on average, while transaction volume over the last three months has been 27% lower than in the first half of 2019.

But the reality is that there remains a housing shortage in Hong Kong (which is probably why home prices are still up 4% year-to-date despite the social unrest in recent months).

With the government now lowering down-payments for first-time homebuyers, especially for homes costing HK$10 million ($1.28 million) or less (80% of transactions in the past 12 months), we would not be surprised to see a rebound in both transaction volume and home prices in the next 12 months.

The longer-term outlook, however, is more uncertain. While the latest policy changes are targeted at raising home ownership, it could aggravate already poor housing affordability and social discontent.

Despite the potential rebound in the housing market over the near term, we remain cautious on the longer-term prospects of Hong Kong’s property market overall. Specifically, we expect more downside to prime office and retail rents.

We are more constructive on industrial properties in Hong Kong, where vacancy remains tight and forward supply is relatively low. Ideally, though, we would prefer cap rates to be 50 to 100 basis points higher than current levels.