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Expert Insights | Investors remain upbeat on Hong Kong property markets despite rising prime rates

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Optimism remains for residential units, industrial properties and land sites amidst the interest rate hike, here’s why.

The US Federal Reserve raised interest rates by 75 basis points again for the second month in a row in July, lifting the Fed’s funds rate to a range of 2.25% to 2.50%. The rate hike cycle was kicked off in a bid to curb inflation as it reached a 40-year high of 9.1%. It is considered an essential step in turning the real interest rates from a negative, to a positive. 

According to Colliers analysis, Hong Kong did not match the rise in US rates every single time over the past five to ten years, in particular during the last cycle in which the Fed hiked rates a total of nine times by a cumulative 2.25%. Hong Kong only raised rates by 0.125%.

A modest increase in prime rate expected in Hong Kong

At present, overall inflation remains moderate and banking deposits stay stable in Hong Kong, with a M3 money supply of HK$16.27 trillion in May this year. There isn’t an immediate need for Hong Kong to increase its interest rate. As the Fed continues to raise rates aggressively in the past few months, the aggregate balance of the Hong Kong Banking System has dropped sharply, putting upwards pressure on prime rates. Even if Hong Kong banks follow any increase in rates after the next Federal Reserve meeting in September, it is likely that the scale will be smaller.

As Hong Kong is expected to move slower in increasing interest rates when compared to the US, the psychological impact on investors should be short-term only. In Hong Kong, the interest rate levied on corporate and personal loans is not very high. Amid the coronavirus pandemic and social unrest in the past two to three years, the transaction volume of properties and loan quality maintained at a healthy level. As developers, powerful families, funds and corporate investors will continue to have their eye on low-density sites and redevelopment projects, but it is expected that big-ticket sales in the primary and secondary residential market as well as the industrial sector will remain stable. 

Rising investment demand in industrial assets

It is anticipated the Hong Kong market will digest the rate hike quickly, with the positive momentum of the property market being carried into the third and fourth quarters. In the second half of 2022, big-ticket investment in residential units, industrial properties and land sites is set to outperform the figures from the first six months. Among which, industrial properties such as data centres, cold storage facilities and logistic assets will continue to draw the attention of investors, which may result in a higher transaction volume when compared to that of office and retail space in the second half of the year.

Fund investors and family investors are becoming more interested in commercial and residential sites, especially given the scarcity of sites for single-block or low-density composite developments.

What is obvious, is property developers, fund investors and family investors are becoming more interested in commercial and residential sites, especially given the scarcity of sites for single-block or low-density composite developments. One of the reasons is that the rate hike will only have a modest impact on such developments. The other being the internal rate of return of these projects and the rigid demand from owner-occupiers meet the targets of the investors. For example, the Winland Group has unified the ownership of Buckingham Building in Jordan and its adjacent lots earlier, increasing the total area for development. Investors may consider it a good time to look for commercial-residential sites and industrial properties. 

Shop prices likely to remain stable

It is worth noting that Hong Kong might have to downgrade its 2022 annual growth forecast, as mentioned by Financial Secretary Paul Chan. It is a sign of a slow economy with consumers being more cautious on spending, which should in turn affect the investment sentiment in the retail sector. However, the distribution of the second batch of consumption vouchers in August will boost consumer sentiment. Rental and price fluctuation in the retail market are not foreseen with a possible drop in vacancy rates.

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Joseph Tong

Senior Director

Capital Markets & Investment Services

Hong Kong

Joseph is a Chartered Surveyor with over 25 years of experience in real estate investment, sales, leasing, market research and consultancy of development projects with major developers in Hong Kong and Asia. 

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