Mainland Chinese firms plough their cash into Hong Kong property as souring foreign ties put US, Australia, UK out of the picture

Capital from mainland China is likely to be the main source of investment in Hong Kong property in the foreseeable future, analysts said, as Chinese businesses face deeper scrutiny elsewhere amid worsening relations with a number of western countries, particularly the US and Australia.

In the first half of the year, mainland Chinese investment in Hong Kong real estate picked up and accounted for almost all cross-border investment versus 61 per cent of the total a year earlier, according to the latest report by property consultancy Colliers. Mainland Chinese also accounted for 11 per cent of total leasing deals on premium office space in Hong Kong.

In August, mainland buyers bought at least two office towers and one hotel building worth HK$4 billion (US$516 million) in total, according to a Reuters report which did not name the assets.

The trend is likely to be sustained. Since July last year, six of 13 sites tendered in government land sales were awarded to mainland Chinese developers. Out of 1,541 regional headquarters in Hong Kong, 216 or 14 per cent were from mainland China, up by 125 per cent over the last decade.

The appetite of mainland Chinese for Hong Kong assets comes against the backdrop of muted interest in the city’s property market, with total investment falling by 70 per cent in January to June, according to data from Real Capital Analytics (RCA).

“Given the current tensions between China and some western countries, in particular the US, a lot of mainland capital will prefer to invest in Hong Kong instead,” said Antonio Wu, deputy managing director, capital markets and investment services, at Colliers International.

Washington has rolled out various measures that made it more difficult for mainlanders to acquire assets in the US including a new regulation that expanded the Committee on Foreign Investment in the United States’ scope to the review of even non-controlling stakes in real estate. In 2018, the US also imposed additional restrictions on foreign investments in sensitive sectors.

Beijing’s imposition of a sweeping national security law on Hong Kong in July further heightened tensions. In retaliation, the US approved a law to punish foreign individuals and banks for “materially contributing” to any failure by the Chinese government to respect Hong Kong’s freedoms. Washington also slapped sanctions on Chinese entities for “militarisation” of outposts in the South China Sea, which barred US firms from doing business with those companies.

“There were some [Chinese] investors who invested in western countries before, like the US, Australia or the UK, where now they have exited their investments with a lot of cash on hand,” Wu said. “This type of capital will need to reinvest, so Hong Kong will be ideal for it.”

Hong Kong has also forged closer ties with the mainland, with cross-border initiatives in areas like stocks and wealth management, making the city a more attractive investment destination for Chinese companies, according to Rosanna Tang, head of research, Hong Kong and Southern China at Colliers.

For other analysts, the mainland Chinese preference for Hong Kong assets goes beyond a fraying of foreign relations.

“The ongoing restrictions on the flow of capital [out of China] is an even larger factor.

“Mainland Chinese investors are still attracted to Hong Kong due to the easier flow of capital, compared to more international commercial real estate markets,” said David Green-Morgan, managing director at RCA Asia-Pacific.

Although mainland China has become a dominant investor in Hong Kong property in recent years, geopolitical tensions are likely to make other investors more cautious about investing in the city, he added.

“Foreign investors will have to compete with the higher volume of Chinese and domestic capital, presenting greater competition for acquisitions,” said Harry Tan, head of research, Asia-Pacific, at property investment manager Nuveen Real Estate.

On the other hand, the influx of mainland capital into Hong Kong’s office market will support prices.

“We also expect the share of residential development and investment in the logistics and data centre space by Chinese capital to rise due to the greater firepower,” Tan said.