In an interview with the Financial Times last week, Kentaro Okuda, the new chief executive of Nomura, Japan’s largest investment bank, said the situation in Hong Kong was “not the same as it used to be”, forcing the bank to “seriously” examine the scale of its 1,000-strong operations in the city. Beijing’s decision last month to impose a new national security law on the territory has further compromised the city’s political and judicial independence, prompting United States President Donald Trump to announce plans to withdraw Hong Kong’s special trade privileges. For the city’s hard-hit property industry, the increased uncertainty about the territory’s standing as a global financial hub could not have come at a worse time. Hong Kong was Asia’s second most illiquid commercial property investment market in the first quarter of this year, according to data from real estate consultant RCA. Foreign investors, who accounted for nearly 30 per cent of transaction volumes between 2015 and 2019, have deserted the market, with local buyers responsible for all the deals in the first quarter. In the occupier market, the net absorption of office space last quarter fell to its lowest level since 2002, according to data from CBRE. In the retail sector, high street rents plunged more than 10 per cent on a quarter-on-quarter basis, cementing Hong Kong’s position as the worst-performing retail sector among the world’s leading property markets. However, there is little evidence that concerns about Hong Kong’s future as Asia’s financial capital have played a key role in the rapid deterioration in the fundamentals of the real estate market. While the credibility of the “one country, two systems” framework has been undermined, the property industry has faced a succession of external and domestic shocks that make it difficult to disentangle the causes of the downturn in both the occupier and investment markets. Over the past two years, Hong Kong has been hit by the sharp slowdown in China’s economy, a full-blown trade war , mass anti-government protests, the city’s first recession in a decade and the Covid-19 pandemic as well as the ensuing collapse in the global economy. What is more, as the first region to be struck by the pathogen, Asia bore the brunt of the virus-induced drop in global commercial property deals last quarter, with transaction volumes falling 26 per cent year-on-year, according to data from JLL. However, the tipping point for Hong Kong’s property market had come in the second half of 2018, when the combination of Beijing’s stricter capital controls and the escalation of the trade war led to a sharp decline in leasing demand from mainland companies, a crucial underpinning of the office market, and a key factor behind the surge in rents in Central, the world’s most expensive office market. Covid-19 and the end of the amateur landlord in Hong Kong and elsewhere Even before the anti-government protests erupted in June 2019 , Chinese firms – which accounted for almost half of gross take-up of office space between March 2016 and March 2019, data from CBRE show – had become significantly less active. By the fourth quarter of 2018, mainland financial institutions were responsible for just 18 per cent of the leasing volume in Hong Kong’s core office districts, according to CBRE. The fundamentals of the occupier market deteriorated much more sharply last year, when the violence and chaos in Hong Kong’s streets decimated the retail sector, which had already suffered declining high street rents for several years. Retail sales have contracted for 14 straight months , a crisis which, according to Savills, has revealed the extent of the sector’s reliance on mainland visitors: Chinese tourist spending accounted for almost 30 per cent of Hong Kong’s retail sales last year, compared with just 10 per cent in 2002. So, by the time doubts about Hong Kong’s status as Asia’s top financial centre intensified last year, the damage was already done. Concerns about the city’s governance and institutions have been a much less influential determinant of sentiment than China’s slowdown and the level of violence in the streets. In the second half of last year, the Hang Seng Properties index fell 7 per cent, and has even risen slightly after Beijing announced on May 21 that it planned to impose the security law. While many factors are at play – the most important one right now being the massive injections of liquidity by central banks in response to Covid-19 – the reality is that political risks in Hong Kong are much more difficult for investors and occupiers to quantify. As one prominent property agent in the city put it, the security law has simply “added more uncertainty to an already uncertain market”, adding that “any move to withdraw from Hong Kong would be a lengthy and complicated process with significant business ramifications, so I don’t think we’ll see occupiers make any major decisions” until things become clearer. The fact that there has so far not been any significant capital flight reinforces the perception among many in the industry that the territory’s role as an offshore funding platform for Chinese companies is too important to be seriously jeopardised. Indeed, the bigger the political risk, the greater the need for financial and economic stability, which could eventually lead to more mainland demand for Hong Kong property. For the time being, however, Hong Kong’s real estate sector has enough problems coping with the fallout from Covid-19. Nicholas Spiro is a partner at Lauressa Advisory