Cryptocurrency buzz is not enough to lead recovery of Hong Kong’s battered commercial property market, analysts say

Despite its early promise, the segment is unlikely to become the ultimate saviour of the city’s sagging retail property market, according to analysts
The dramatic collapse of FTX in November sent shockwaves through the industry, and made some crypto firms reluctant to risk expansion

Hong Kong property

Cheryl ArcibalandLam Ka-sing

Published: 2:00pm, 19 Feb 2023

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Hong Kong’s bid to become a cryptocurrency hub, and the apparent appetite of its citizens for virtual assets as an investment, have prompted new-economy firms to take up commercial space in the city.

In May last year, a survey by Savills showed businesses focused on digital currencies, NFTs and blockchain, buoyed by big profits, were creating new demand for office space.

Firms such as Mantra, which operates a blockchain ecosystem, and 8 Blocks Capital, a cryptocurrency trading firm, took up office spaces on the fringes of Central, Hong Kong’s main business district.

Coingaroo opened two digital currency exchange outlets, one in Mong Kok in Kowloon and the other in Causeway Bay on Hong Kong Island, according to its website. Its office is also in Mong Kok.

In Tin Hau, a two-storey shop is occupied by CoinWeMit, which offers over-the-counter services for investors in cryptocurrencies such as bitcoin, Ethereum and Tether.

02:27

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Their presence brought some welcome relief to a segment that had been mired in a downturn as Covid-19 drove multinational companies away and sparked an exodus of locals and expats.

However, the segment is unlikely to become the ultimate saviour of the city’s sagging retail property market, according to analysts.

The sudden implosion of FTX in November rocked the industry to its core and shattered confidence in a market already famed for its unpredictability. The heightened levels of uncertainty made many cryptocurrency firms reconsider any immediate plans they had for aggressive expansion.

“We do not expect that these set-ups will take up a large amount of vacant commercial space in Hong Kong,” said Martin Wong, director and head of research and consultancy for Greater China at Knight Frank.

Oliver Tong, head of retail at JLL in Hong Kong, was equally pessimistic about the immediate future for the market but said the introduction of a new regulatory framework might lure more digital currency companies to Hong Kong.

“Crypto firms could become a more significant tenant of retail space in the medium term as the government is set to implement a new set of regulations,” said Tong. “Yet the overall retail market has been very cautious since the bankruptcy of FTX.”

The city is aiming to be a hub for virtual assets and has been rolling out various initiatives and regulations to beef up the industry. The measures, announced in October, include a new licensing regime for digital asset providers, tokenisation of green bonds and allowing retail investors to trade cryptocurrencies.

Digital or virtual currencies are not backed by a government authority, which potentially makes them a risky asset class.

Hongkongers have been seemingly unfazed by the lack of regulation hitherto. In a survey released in December 2021 by credit card company Visa, the city’s residents emerged as among the world’s largest investors in cryptocurrency. About a third of the population had either invested or used the asset as a medium of exchange.

Analysts believe the retail market is turning a corner now international borders are fully open and is likely to see some recovery this year. That is likely to be the main driver of a rebound in the commercial property sector, they said.

Retail property rents in Hong Kong had declined by 42 per cent since mid-2019, property consultancy CBRE said late last year. Compared to their peak in 2014, when mainland Chinese demand for luxury products began to wane, rents had retreated by 62 per cent.

“With the full reopening of borders between the mainland and Hong Kong, we expect retail activities to ramp up gradually, but they may not immediately get back to pre-Covid levels,” Knight Frank’s Wong said. “That said, retail rents may stabilise in the first half of the year and potentially bottom out in the second half.”

CBRE predicts as much as 10 per cent growth in rents paid by the city’s high-street retailers in 2023. Morgan Stanley has forecast a 5 per cent increase in retail rents this year as a surge in mainland Chinese tourists boosts consumption. The investment bank expects retail sales will grow by some 15 per cent this year and tourist visits will reach about 70 per cent of their level in 2018, before the pro-democracy protests and pandemic brought Hong Kong to its knees.

Colliers sees high-street rents growing by 8 per cent this year, thanks to the reopening of the border.

“We have received many leasing inquiries recently, particularly from beauty and fashion tenants,” said Cynthia Ng, head of retail services at Colliers. “We expect leasing momentum will pick up in the second quarter, and shops with an area of 1,000 to 2,000 square feet with monthly rent between HK$300,000 (US$38,220) and HK$500,000 will be sought-after.”

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