Property

How China Will Impact Hong Kong\'s Future Property Market

How China Will Impact Hong Kong\China’s growing influence on the world, accurate or not, can be seen in most facets of everyday life. Designers are designing to Chinese tastes, hotels are catering specifically to Chinese tourists, and movies are bending content to Chinese demands to ensure release in the world’s second largest media market. Though India rivals China’s growing affluence China is the economy to watch. Hong Kong has been a gateway to the PRC for years, and according to new research by Jones Lang LaSalle, the ties that bind are going to have a bigger and bigger impact on the SAR in the coming years.

Buoying Commercial Space

Hong Kong has always been subject to the ebb and flow of global tides and the city has traditionally tied itself to American fortunes: in 1981, local GDP growth that correlated to US economics measured just shy of 0.5. Vis-à-vis China it was -0.2. Between 2011 and 2015 that number flipped to -1.0 for the US and .075 in favour of China. With ceaseless chatter — and optimism — over the “One Belt, One Road” initiative that correlation is only going to become more pronounced. So is it the right way to go given the unsteadiness of recent months and a larger, potentially disastrous demographics problem looming over China’s economic future?

“That is true in theory, but I think for long term development it’s beneficial to form stronger relationships with China,” begins Denis Ma, head of research at JLL. “It will be the biggest economy in the world so we should be doing as much as possible to be part of that. As far as demographic issues are concerned, that could create problems as well as a lot of opportunities … The good thing is there’s time to correct it. And Beijing does have Hong Kong’s back.”

JLL’s new report, Past, present, future: China’s role in driving the growth of Hong Kong’s property market, focuses on the city’s four core real estate sectors — commercial, industrial, retail and residential and examines how China’s role is influencing them. If anything, 2015 made it clear that without Mainland demand, the local office sector would have suffered. “Demand for office space is increasingly being underpinned by mainland corporates, while a persistent slowdown in inbound tourism from China has put a large dent in retail sales growth of late,” the report said. However, “Cross-border trade remains the lynchpin of the city’s warehouse sector.”

The embattled retail sector has, arguably, the most to gain or lose by linking tightly with China. Shopping by PRC tourists contributed $178 billion to the Hong Kong economy in 2015 — a weak year. But there are some challenges ahead, chiefly a slowing Mainland economy, a continuing anti-graft campaign, competition from other regional cities and entry visa restrictions. However, slipping rents offer opportunities for local retailers in prime districts and a rebalancing of the trade and tenant mix for more variety. JLL expects the tourists to return and bring more varied shopping expectations with them. However, chatter over a sales tax has been resurrected, which could be a fly in the ointment. “If that happens then our competiveness is going to drop,” admits Ma. “With a sales tax it’s a matter of crossing that bridge when it happens, but it would definitely have a negative impact.”

The Chinese Residence

But commercial and retail spaces are not the only sectors that will feel the touch of the PRC. Even as individual purchaser and investor numbers fall off — roughly just 10 percent of primary sales go to Mainland buyers now, down from 40 percent in 2011 — Chinese outbound investment continues to rise, and developers are entering the Hong Kong residential sector at greater rates. “Mainland participation in the residential market is slowly transitioning from a buyer to that of a developer,” said JLL, which also projected that between 2016 and 2019 one in 10 Hong Kong homebuyers could potentially be living in flats constructed by Mainland developers.

But will they help or hurt the already shaky residential market. Chief Executive CY Leung finally buckled and admitted Hong Kong had affordability issues, which are just now starting to slowly come under control. PRC developers are increasing their activity in government land sales — and they’re doing it aggressively. In 2015 Mainland firms made over 50 percent of land bids and won approximately 25 percent of them, often by setting new, higher benchmarks. State-owned Poly Property, for example, won a Tuen Mun site by paying 30 percent more than the previous high for the area as well as prevailing secondary homes prices (the final rate was $15,095 per square foot). Market expectations were blown away in nearly 75 percent of bids between 2013 and 2015. Given the effort the government and the Monetary Authority have put into bringing prices down, the Mainland behaviour could scuttle progress.

“Theoretically that is possible, with these developers coming in too hot. But again, we’ll have to wait and see how they position themselves in the market,” Ma reasons. “One of the things is that in the past you had these few big guys who had holding power; the little developers couldn’t do that,” he continues. That petulant wait-and-see slowed supply and put pressure on prices, as developers waited until the iron was hot to strike. That could change — for the better. “I think what you’re going to see is someone who can play the game, who can challenge these big developers on holding patterns.”

Ma notes its too soon to guess how the residential sector will react to the fresh blood, as the first wave of Mainland flats isn’t expected to come to market until 2017 or later. But ultimately they’ll likely shake things up for the better, a sentiment that applies to all property in the SAR. “China is still going to be good for Hong Kong,” finishes Ma. “It’s better to bank on them than be left on the sidelines.”