Hong Kong property

Yuan controls may slow mainland investment in Hong Kong property, but demand remains

Transaction volumes may slow after imposition of new capital controls, but prices should remain firm and could even rise, analysts say

PUBLISHED : Tuesday, 06 December, 2016, 2:45pm
UPDATED : Tuesday, 06 December, 2016, 7:57pm

China’s new round of capital controls may have a slowdown effect on money entering Hong Kong’s property market but mainland demand will continue to remain strong next year, analysts say.

Liquidity from mainland investors will likely fall “significantly” in the city following the tightening of yuan going into overseas real estate, according to Denis Ma, head of research at Jones Lang LaSalle (JLL).

“The investment market for commercial and industrial properties is now at a crossroads,” Ma said. “Without [mainland] investors, the scope for capital values to continue to push higher will be severely restricted.”

Large transactions continue to be underpinned by mainland investors, JLL said, as they accounted for at least a quarter of total investment volumes in Hong Kong’s property market.

The Chinese government’s latest capital restrictions follow months of volatility for the yuan, which has weakened by over 7 per cent against the US dollar in the past year. The new restrictions include the first cap on outbound yuan for companies in over two decades, increasing scrutiny over high-value overseas transactions, and bans on foreign real estate investments over US$1 billion.

The controls could lead to “some slowdown” in mainland money going into residential land plots or big-ticket office bloc transactions, according to Stephanie Lau, assistant vice president and analyst for Moody’s Investors Service.

While it is too early to gauge the full impact of the capital controls, land prices and commercial asset values may be affected in the near-term if a slowdown in capital flows persist, she said.

Without [mainland] investors, the scope for capital values to continue to push higher will be severely restricted
Denis Ma, Jones Lang LaSalle

But mainland investors are still eager to buy land in Hong Kong, even if they may be less aggressive in price bidding, according to Vincent Cheung, executive director of valuation and services in Asia for Colliers International.

Profits will “not be as handsome as before” due to the weaker yuan, but the desire for non-renminbi assets will still make the city an attractive place for mainland investment, he said.

Even with yuan restrictions, Cheung said many mainland companies already have money in Hong Kong for potential investments, so the controls will not affect their en bloc transactions.

Additionally, these companies can use different channels to move renminbi into Hong Kong, such as purchasing properties as individuals instead of as companies, Alva To Yu-hung, senior managing director of Hong Kong at DTZ Cushman & Wakefield, told the Post.

For 2017, the yuan controls and a recent increase in stamp duty for non first-time buyers may slow transaction volumes in the residential sector, To said, but prices will not see a correction or downturn.

In fact, Cheung believes residential property prices will rise next year, exceeding peak levels from September 2015 when housing prices first began to taper off before rising again in mid-2016.

“I am quite optimistic,” he told the Post. “The residential home market will rebound in the second half of next year.”

For other property assets, office prices will trend upward next year while retail property prices will slow, To said.

Capital values for office and warehouse assets are expected to grow between 0 and 5 per cent next year, according to Ma.