Worth the effort?

Is Hong Kong sitting on a property bubble that might eventually burst? Since 2003, residential real estate prices have skyrocketed nearly 400%, and between September 2017 and February 2018, prices crept up another 6.9%. If that’s not an asset bubble, nothing is, and it’s a question that has been tickling investors and analysts for several quarters. 

Or is it? April research by Colliers International, which the consultancy called a reality check, found “The Hong Kong property market remains at a low-medium risk level.” Risk may be low, but is Hong Kong—with its notorious volatility—worth the effort for investors? The short answer is yes.

“It is still worthwhile investing in Hong Kong residential property,” theorises Landed author Chris Dillon. “Hong Kong is a global commercial hub that will continue to be popular with wealthy mainland investors and business people.” 

hong kong night view

Short-term Pain

A toxic cocktail of demand, speculation and sentiment, give rise to asset bubbles that result from the rapid and steep inflation of prices. A sharp fall-off in prices is the “burst” when demand flags or supply increases. Black Tuesday, Black Monday, Japan’s economy of the 1980s and the Dot-Com (occasionally called the “dot con”) bubble of the ’90s, all rooted in speculation and over-valuation, are just the most famous bubbles, but Hong Kong’s property market fits the mould.

According to web portal Global Property Guide, Hong Kong has some of the worst gross rental yields in the world. Sydney averages 2.52%, Toronto 3.98%, London 2.61%, New York 2.91% and Tokyo 2.66% — all rated “very poor”. Hong Kong fits right in with an average yield of 2.62%. “Excellent” yields can be found in Amman, Quito, Cairo, San Salvador, Kyiv—and Jakarta—all averaging 8 to 10%.

But does that mean Hong Kong property isn’t worth the effort, for institutional or individual investors? “We do think it’s worth it. Like most real estate markets, it’s a matter of demand and supply dynamics,” begins Nigel Smith, managing director at Colliers. “The key issue fundamentally is that there’s a lack of supply, primarily in core centres. Inevitably, even if demand stays level, you’ll see prices and rents relax and slow down.” Crucial to investment health in Hong Kong is office leasing, and the subsequent tenant pool it creates. With multinational corporations exercising caution or contraction, and PRC firms entering the market with differing tastes and standards, are luxury leasing and office sectors losing their lustre?

“That’s an interesting point,” agrees Smith, however, “We do still see a number of cross-border as well as international [corporates] coming in and we’ve seen an increase in residential transactions. And landlords have already anticipated that, not just in the mass residential market. Go to places like Kennedy Town and you’ll see expatriates in those areas looking at older buildings, smaller flats. Like the office and leasing markets, decentralisation becomes the product of a lack of supply and increasing rents and prices.”

By Colliers’ metric, the key to Hong Kong’s risk level is in the relationship between actual and equilibrium prices. Equilibrium prices are those where supply is equal to demand. Actual prices deviate when any number of factors—affordability, borrowing costs — come into play. Anything below 5.9% is resistant to radical correction, and currently Hong Kong is sitting at just over 5%. Furthermore, the volatility of the last six months did not exceed the 12.1% standard deviation that hints at crashes, the last of which were during 1997, 2003, and 2008—the Asian Financial Crisis, SARS and the GFC.

“According to historical property patterns, it is highly unlikely that Hong Kong’s property market will head into a major adjustment in 2018,” adds Colliers’ Director of Research, Daniel Shih. “We forecast that price growth for the residential market will continue. Investors will remain cautiously optimistic about office spaces while industrial properties will benefit from the new industrial building revitalisation scheme.” During the same period, office values surged 4.7%, and industrial grew 5.4%—putting all three sectors in the low to medium risk category.

hong kong victoria harbour panorama

Long-term Gain

But does low risk translate into worthwhile risk? Smith and Dillon argue in favour of Hong Kong investment, though taking the long view is wise. “With current prices and mortgage restrictions, you need a lot of cash to invest in Hong Kong. And while there will always be a market for trophy properties on The Peak, I don't see a lot of upside for US$1 million microflats,” cautions Dillon. But 20-year trends (400%) would indicate property Hong Kong is a good long-term asset. With risk an issue for investors, Hong Kong’s safety is appealing.

“You can go to many other places in Asia or Southeast Asia, maybe with a little more risk, and do much better,” reasons’s Thorsten Allenstein. “But you know if you buy something here… the lack of yield today will be made up with capital gains over the long term.”

The sheer volume of valuable road and rail infrastructure that’s imminent will be a boon to investors, and the Greater Bay Area, as it’s now referred to (not the Bay Area in California), incorporating the current Pearl River Delta with Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing will only force property to trend upwards. Commuters from those areas plus elderly cross-border residents will have an impact on prices, just how is unclear. 

Finally, despite the perception that MNCs are fleeing for greener pastures, Smith reiterates that international operators are still coming into the SAR; food and beverage operators and global retailers still exist that have yet to get a foothold in the city. That, positive consumer demand, and limited residential and commercial supply bode well for the future in all sectors. “Retail is slower, largely because the world is changing, [but] for us the fundamentals are strong,” finishes Smith. “Hong Kong’s position is still very much a landing spot for companies both ways, and the financial firms will continue to prosper here, including multinationals.”