Worst may be over for Hong Kong’s property sector, but a full recovery is impossible without mainland reopening
- The end to hotel quarantine could not have come sooner for Hong Kong, where commercial rents have fallen by a third since 2019 and home prices are being hit by rising interest rates
- But even with this win, hopes of a recovery are tempered by the fact that little has changed over the border
Hong Kong’s strict application of Beijing’s “dynamic zero-Covid” policy cut the city off from the rest of the world as well as from mainland China. The economic and reputational damage to Asia’s financial hub has added to the fallout from a succession of domestic and external shocks over the past several years.
In the commercial sector, hopes for a recovery in the office and retail markets were dashed when the Omicron outbreak erupted at the start of this year. Yet, the sharp fall in grade A office rents – down 30 per cent since their peak in mid-2019 – has finally abated. In the second quarter of this year, rents fell just 0.3 per cent quarter on quarter, the smallest decline since the second quarter of 2019, data from CBRE shows.
The boost to sentiment from the lifting of hotel quarantine positions Hong Kong as a “reopening play” in Asian real estate and could provide the catalyst for a meaningful recovery. “We know that when restrictions are lifted, markets bounce back, as was the case in Australia and India,” said Kevin Coppel, managing director Asia-Pacific at Knight Frank in Singapore.
However, Hong Kong is hardly an economy unshackled. For starters, its reopening is partial. Travellers to the city are still subject to frequent testing and monitoring and are banned from going to bars and restaurants for the first three days following their arrival.
It is hard to imagine a resilient and durable recovery in Hong Kong when the part of the world the economy is most dependent on continues to impose draconian controls. Tom Gaffney, regional managing director at CBRE in Hong Kong, said that, while the partial reopening could mark a turning point for the commercial property market, “we need our neighbours and we need them ASAP”.
According to CBRE, as many as 948 companies – 9.5 per cent of all grade A office occupiers – downsized their office space in the three years to March 2022, contributing to a net reduction in occupied space of 2.3 million square feet. The pressure on vacancy rates and rents is exacerbated by a supply boom, with 7 million square feet due to be delivered in 2022 and 2023. Even a full reopening would not offset the lasting damage to occupancy caused by adverse demand and supply factors.
Still, there are bright spots in Hong Kong’s real estate sector, ones that would be brighter still if two-way quarantine-free travel were restored. Leasing demand from mainland firms in the office sector, while much weaker in the market as a whole in recent years, has proved resilient in certain districts, resulting in a widening of Chinese companies’ footprint in the market.
Sam Gourlay, head of tenant representation at JLL in Hong Kong, noted that Chinese firms accounted for 12.1 per cent of new leases in the first half of this year, up from 3.6 per cent in the corresponding period in 2021.
This trend would undoubtedly become more pronounced if Beijing began to ease its zero-Covid policy. Yet, with little sign of this happening, and the timing of a full reopening in Hong Kong still in doubt, the recovery will remain fragile.
Nicholas Spiro is a partner at Lauressa Advisory