REAL ESTATE – China’s Impact on Hong Kong’s Property Market

In a new era of slower Chinese economic growth, what are the implications of a wave of declining demand from Mainland Chinese companies, investors and tourists alike on Hong Kong’s commercial, retail and residential property markets? Denis Ma, JLL’s Head of Research for Hong Kong, talks about China’s current and future role in driving the local property market

By Leon Lee


Often described as the gateway to China, Hong Kong’s proximity to the economic juggernaut is one of the many advantages that makes the city a leading international business hub. With an increasingly growing connection with Hong Kong, China has had a significant impact in various sectors of the city such as financial services, banking, retail and property.

However, as China enters a new era of slower economic growth, there are questions about the long-term implication, given the declining demand from mainland companies, investors and tourists alike. Of particular interest is real estate in Hong Kong as indicated in a recent white paper by JLL on China’s influence across the local property market.

Denis Ma, JLL’s Head of Research for Hong Kong, shares some of his insights and research on China’s current and future role in driving the growth of the local property market which includes commercial offices as well as the other two core sectors – retail and residential.

The demand

As China’s economy steadily grew over the last several years, Hong Kong’s property market has benefited in terms of rentals and investments. Over the last seven years since the global financial crisis, rental prices have doubled. The number of Mainland Chinese companies with an established office in Hong Kong has increased by about 50 percent over the last 10 years.

“In terms of new lettings, we’re seeing more and more Chinese demand coming through the market. Over the last five years, their market share has basically doubled,” says Ma. “Last year, in Central for example, Chinese tenants accounted for just under 40 percent of all new lettings in that sub-market. This is important because this is probably a trend that we’re going to see continue moving forward.”

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The demand is primarily coming from banking and financial services companies as well as some real estate, insurance and professional services firms that have set up offices in Hong Kong. And with the strong demand from Chinese companies, it has pushed the city’s property market above other places.

“It differentiates Hong Kong from a city like Singapore where we’re seeing that MNC demands have been quite flat over the last couple of years. Yes, Singapore has some supply issues but primarily it’s the Chinese demand in the market that has actually propped up the Hong Kong’s office market,” Ma explains.

When Chinese companies make the initial move to Hong Kong, they will typically look for a smaller space (less than 5,000 square feet) in prime locations like Central. As their companies grow, they will lease up to 60,000 square feet and afterwards, look to buy office space that are 100,000 square feet or more.

Market activities

Over the last three years, three of the largest deals in Hong Kong’s office market were completed by Chinese companies. In November 2015, Evergrande Real Estate bought Mass Mutual Tower in Wan Chai for a record HK$12.5 billion, while in February of this year China Everbright paid HK$10 billion for Dah Seng Financial Centre, also in Wan Chai.

The huge demand for office space has raised some issues as there is a shortage of vacancies in the market right now. This is further exacerbated by Chinese companies’ preference of office spaces in Central, leading not only to an imbalance of demand outstripping supply but also a stagnation of buying/selling activities due to the fact that offices in commercial areas other than Central are not on the buyer’s list.

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“In my opinion, I would say that demand is actually still there in the market,” Ma says. “The problem is that vacancies are so tight, there is not a lot of opportunities for them to move. If they went out and looked beyond Central, perhaps we could see a little bit more activity.”

“We’ve been trying to get them to look beyond, but right now they still remain very much focused in Central,” he adds.

Currently, Chinese companies have a total footprint of 5.2 million square feet in Central which accounts for 21 percent. According to estimates by JLL, the number will increase to seven million square feet to reach 28 percent in five years’ time.

“What it means is that if you don’t have a Chinese neighbor in your office building now, you probably will. It also likely means that some people are going to have to be squeezed out of Central. It’s actually our views that it will be the larger MNCs getting squeezed out of Central, in particular the banks.”

Favorable government policies such as the Shanghai-Hong Kong Stock Connect and the Mainland-Hong Kong Mutual Recognition of Funds will help maintain the demand of office spaces from Chinese corporations for the near future.

Impact of tourism

The impact of the Chinese consumer on Hong Kong’s retail sector has been well-documented in the news. In 2015, 46 million people from Mainland China visited Hong Kong and spent an estimate of HK$178 billion. That figure accounted for 40 percent of all retail sales in the city which was just under HK$500 billion. On average, they spent HK$3,900 per visit.

Chinese visitors are attracted to Hong Kong as a shopping destination because of the authenticity of products, a diverse range of goods available and favorable pricing. However, last year the number of Chinese visitors decreased for the first time in almost 20 years. It coincided with decreases in retail sales, especially in high-end luxury products including brand-name watches and jewelry.

There are an array of reasons contributing to the decline. With the slowing of the Chinese economy, people are generally more cautious about where they go on holidays and how much they spend. And for those who decide to travel abroad, they are increasingly heading to Japan, Europe or North America rather than Hong Kong because they’ve already visited the city on a previous trip.

For visitors who choose to come to Hong Kong, their habits are different from previous visitors. “Increasingly, more visitors coming into Hong Kong are here on a one-day visit rather than staying overnight,” Ma points out. “They usually spend less and tend to target a different segment of the market. Rather than coming down to Tsim Sha Tsui to buy a luxury handbag, they’ll probably stay around the borders and buy daily necessities.”

A changing landscape

In April 2015, the Chinese government reduced the number of times Shenzhen residents could visit Hong Kong to once a week in an effort to combat the growing issue of parallel traders. Previously, under the Individual Visit Scheme (IVS), residents who had multiple-entry permits could make as many trips to Hong Kong as they wish.

Ma believes that if the policy was reversed, it could potentially bring back 5.4 million people back to Hong Kong and boost the retail market. He adds that if the government expanded the IVS beyond the current 49 cities in China, it could add 10.4 million visitors and bring in HK$20 billion in retail sales to the city.

“Looking ahead, for the market, we’re going to see more rebalancing which might be a good thing for Hong Kong. To see more diversity coming back in the streets is a positive for the market in the long-term,” he says.

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For retailers, there are going to be opportunities for those who want to move into prime shopping locations in the city as the demand from luxury brands has decreased – an issue not just restricted to Hong Kong but other areas in China as Chinese shoppers become more sophisticated and selective with their purchases. However, Ma believes the luxury brands will make their way back to Hong Kong in the long term.  

In the residential sector, sales to Chinese buyers have slowed down as the Hong Kong Government introduced the Buyer’s Stamp Duty in 2012, which places an additional 15 percent duty on any acquisition by a non-Hong Kong permanent resident. In addition, Chinese buyers are preferring to purchase properties overseas in the UK, US and Australia.

Instead of Chinese buyers, Chinese developers are playing a bigger role.

“Over the last couple of years, Chinese developers have been increasingly active in the land sales market. They’ve been active in submitting bids and they’ve actually started to win a lot more bids,” says Ma. “And when they do win bids, very often, they are quite aggressive and have been paying in premiums.”

As of the beginning of April this year, Mainland Chinese developers have already won three of the five residential land sales completed in 2016.

The developers are coming down to Hong Kong for a number of reasons. One is because the Hong Kong property market remains fair and open compared to other places. Another has to do with developers’ global expansion strategy. For developers, especially those in southern China, who want to grow their business, they need to have Hong Kong in their stable of properties.

Chinese developers definitely have the resources and potential to grow in size to compete with the handful of local developers in the Hong Kong residential market. For some of the smaller local developers, there might be opportunities to partner with their Mainland counterparts through joint ventures.

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