Like many other types of investors, property investors take into account market yield when they make investment decisions. In general, yield is regarded as the annual return one can achieve from investments compared to capital value. Property yield measures the annual rental return investors can expect as a percentage of purchase value. In Hong Kong, the market yields of different types of residential properties dropped quite notably over the past 10 years, from a range of 2.5 per cent to 3.7 per cent in early 2011, to the current level at 2 per cent to 2.4 per cent, according to data published by the Rating and Valuation Department. The trend has been similar, but less obvious for non-residential properties in the city during the same period. The market yield of Grade A offices declined to 2.6 per cent from 3.1 per cent, while that of retail properties eroded to 2.7 per cent from 3.1 per cent. It dwindled to 3.1 per cent from 4.1 per cent for industrial premises, mainly in private flatted factory buildings. The yields for Hong Kong properties are among the lowest in major Asian markets. The average yield for non-residential properties is 4.5 per cent to 5.5 per cent in Tier-1 mainland Chinese cities, and 3.6 per cent to 4.6 per cent in Tokyo, according to data compiled by Knight Frank. They generate 4 per cent to 6 per cent in Singapore, and 6 per cent to 8 per cent in Kuala Lumpur and Jakarta. Last year, Hong Kong recorded 59,880 residential transactions and 13,442 non-residential transactions, according to government records, marking a drastic decline from the boom year of a decade ago. There were 135,778 residential and 26,961 non-residential transactions in 2010. This might lead to the quick conclusion that property assets in Hong Kong are not as attractive to investors as before, as we have seen the Hong Kong property market lose its competitiveness in the past decade. However, the statistics require a closer examination. Rental returns did not drop in absolute numbers. According to official data, the overall residential rental index increased 61.1 per cent between 2010 and 2020. Office rents surged 69.6 per cent, while retail and industrial rents grew by 45.2 per cent and 103.7 per cent, respectively. This shows that investors did not receive less rental income even though the yield was lower. Despite a much lower transaction count, total volume in dollar terms was almost on par. In 2020, total transaction of all properties amounted to HK$628.4 billion, an 8.8 per cent reduction from HK$689.2 billion in 2010. Taking into account the stringent measures on purchase restrictions in various forms of stamp duties and a tighter loan-to-value ratio by the government since 2010, the drop in total transaction value can be considered as negligible. What happened in the property investment market? Investors have continued to put money into real estate assets in Hong Kong even though the potential rental yield is comparatively lower than in other regional Asian markets. The local property market has perfectly demonstrated what is called “yield compression.” As interest rates remained low after the global financial crisis and an unrelenting quantitative easing (QE) measures, there was a notable spread in rental yields over other low-yielding fixed-income financial products. That led to an inflow of hot money into the property market and narrowing of the yield advantage. This was combined with limited new supply of high-quality real estate assets in Hong Kong, entrenching the city’s property assets as a safe haven. All of these factors have contributed to yield compression in the property market over the past decade. As the market saw lower yields and higher rents, the implication was higher price growth for property assets. Even when the market was battling the Covid-19 pandemic in 2020, we still witnessed major transactions as investors sought bargain deals in the market and continued to see trophy assets in Hong Kong as good investments for long-term capital gains. One such example is the HK$9.845 billion acquisition of Cityplaza One in Taikoo by a Gaw Capital-led consortium from the Swire Pacific group in November last year. With the Hong Kong Monetary Authority likely to follow the Federal Reserve’s policy of keeping interest rates near zero through 2022, property yields should stay low for the foreseeable future. The low interest rates, low yields and plenty of hot money will continue to make Hong Kong an appetising market for long term property investments. Given the low risk, investors have accepted the low yields while banking on more upside in their capital value over time. Martin Wong is director, head of research and consultancy , Greater China, at Knight Frank