Cities in trouble: London will weather a no-deal Brexit but can Hong Kong survive its political crisis?
- While commercial property investment in both cities has fallen sharply, the challenges facing Asia’s premier financial hub are more severe than those affecting London. In Hong Kong, the anti-government protests have only just begun
The economy has begun to shrink. Commercial property transaction volumes are plummeting. Office leasing activity has weakened significantly since last year. Most worryingly, the institutional underpinnings of the real estate investment market have been thrown into question by an unprecedented threat to the status of one of the world’s leading financial centres.
If this sounds like the predicament faced by Hong Kong, that is because it is. Yet it also happens to be the one confronted by Britain.
In Central London, investment activity slid 34 per cent year on year in the first six months of this year, dragged down by the lowest level of investment in the capital’s office market in a decade, data from property adviser JLL shows. Even Asian buyers, who have been the most acquisitive investors in London’s office market over the past several years, were net sellers for the first time since 2009.
However, while the commercial real estate investment markets in Hong Kong and Britain are both suffering from a surge in political risk, the challenges confronting Asia’s financial hub are of a different order of magnitude to those faced by London.
Even in the event of a no-deal Brexit, the City is likely to remain Europe’s dominant financial centre, mainly because of its highly prized regulatory framework that is based on English law.
Second, Hong Kong is a much less liquid real estate market than London. According to data from JLL, the city did not even make it into the world’s top 10 most actively traded commercial property investment markets in the first half of this year. London, by contrast, while slipping to seventh place, was the most liquid market in 2017 and 2018.
What is more, the slowdown in office leasing activity has been much more pronounced in Hong Kong because of weaker demand from mainland companies, which have preferred to lease space in core locations. Hong Kong’s Central district recorded a negative net take-up in the second quarter, for the fourth quarter in a row, data from Colliers, another property adviser, shows.
Third, Hong Kong’s real estate investment market, and the city’s role as a financial centre more broadly, faces much stiffer competition from regional rivals. Shanghai’s commercial property market attracted more investment in 2017 and 2018, and was the world’s second-largest recipient of cross-border investment after Paris in the first half of this year, JLL notes. The growing influence of Shanghai (and Shenzen for that matter) increases Beijing’s resolve to take a harder line in Hong Kong.
What is clear is that the further Hong Kong slides into chaos, the more the unrest makes the Brexit-induced woes of London’s commercial property market look eminently manageable.
Nicholas Spiro is a partner at Lauressa Advisory