Concrete Analysis

Transaction volumes down but Hong Kong property pricing proves immune

Trickle-down impact of seven years of global central bank easing has boosted asset prices across Asia and Hong Kong

PUBLISHED : Wednesday, 20 May, 2015, 6:00am
UPDATED : Wednesday, 20 May, 2015, 6:00am

Although the government's demand curb measures have dragged down transaction volumes, pricing in the Hong Kong real estate sector has proved largely immune to the downdraft.

The main reason behind this tension between weakening economic fundamentals and compressed cap rates is clear enough. It is evidenced that, perhaps of greatest importance, asset prices (across Asia and Hong Kong) have been boosted by the trickle-down impact of seven years of global central bank easing.

Hong Kong real estate has been absorbing an endless stream of liquidity from a variety of sources, both outside Asia and within. These include sovereign wealth funds, real estate investment trusts, insurance, banking and finance firms, as well as accumulated high-net-worth clients from across the region.

Interest rates are still very low in many countries, near zero in nominal terms and negative in real terms. It has been a way of driving asset prices up and thus creating a wealth effect for individuals and investors.

Despite the prospect of impending US interest rate rises, there seems little prospect of that flood of liquidity ending. While the US Federal Reserve has ended an era of unprecedented asset purchases, rising aggregate stimulus from other central banks has filled the gap. The European Central Bank expanded its balance sheet and Japanese central bank easing contributed further billions of dollars per year. Current increases in central bank easing now exceed US$1 trillion per year.

Factoring in the risk of interest rate rises, most prospective buyers are seeking value-added properties that provide a greater reliance on defensive plays and income growth. Investors who used to target core assets will now look into decentralised locations and are taking on more challenging development activity through refurbishment and repositioning of tenants.

The Hong Kong market will remain active with buyers competing for value-added properties. Chinese investors are now the biggest foreign buyer of property across the globe and the trend of their offshore buying spree is likely to intensify. They already have extensive domestic real estate exposure, so offshore investment allows them to diversify their risks.

Further central bank easing programmes are fuelling prices and the spiralling price of property assets raises concerns over its sustainability.

Chinese investors are now the biggest foreign buyer of property across the globe

Although all asset classes are at historic low yield levels, it is set to be a good year in 2015, but with property prices growing at a more moderate pace than the past few years due to the anticipated interest rate increase in the US.

Given Hong Kong's peg to the US dollar, the US federal funds rate is the key driver of Hong Kong borrowing rates, along with interbank liquidity.

If Hong Kong liquidity remains abundant, an interest rate increase is expected to edge up slower than the federal funds rate, as evidenced in the interest rate up-cycle in 2004.

Hong Kong interbank liquidity is now at a high level of HK$310 billion (compared with the average daily closing aggregate balance of HK$5.02 billion in the first eight months of 2008), and the exchange rate of the Hong Kong dollar is close to the stronger end of the fix range, which indicates an inflow of funds.

Although the government has done much to ease an overheated property market, prices still have climbed to historic heights. Our bullish outlook on Hong Kong property prices is based on the excess liquidity throughout the global economy, abundant interbank liquidity in Hong Kong, low vacancies across all property types in the city, no oversupply situation and rental growth gaining momentum this year.

These factors are supporting further growth in the coming years. The anticipated interest rate increase in the US will only dampen buying sentiment, leading to a more moderate rate of property price growth.

Joanne Lee is a senior manager, research and advisory, at Colliers International