The COVID-19 pandemic continues to weigh on the Hong Kong investment market, especially those sectors with assets that are closely linked to the global environment, such as retail and hospitality. Yet, in the second quarter, Hong Kong started to show signs of activity with private investors making the first moves leading to some improvement. Critically, there are still underlying challenges in the market with a pricing dislocation between the bid and asking prices, economic downturn and the introduction of the National Security Law, which has prompted concerns around the city’s future role as a global financial hub.
Hong Kong investment pricing dislocation
Despite the slight rise in Quarter-on-Quarter (QoQ) transactions, investment volume remains limited with both sides of potential deals contributing to the delayed decision-making process. For sellers, we’re seeing that most are remaining resilient with the financial strength to hold their position and limited pressure being seen from banks. And for buyers, there aren’t many distressed assets in the market with investors’ appetites leaning towards wait and see for what might develop in H2 of 2020. We have seen some bids submitted, but with limited interest which exemplifies the large dislocation between the bid and asking price.
This standoff won’t last forever, something will change. Both sets of stakeholders need to watch out for movement that will destabilise the market and turn the tide on this stalemate. This could include a drop in tenant generated revenue as a result of the seriousness of COVID-19’s third wave. For occupiers, economic performance could become an issue and see a change in position on their real estate strategy leading to a drop-in income for the asset owners, creating pressure in areas where there wasn’t any before.
From a governance perspective, there are current measures in place that see buyers pay up to 8.5% in stamp duty on commercial property prices. These cooling measures are put in place to help control economies that run the risk of overheating and becoming unsustainable. In a market where there is dislocation around valuation prices, removing this levy could help buyers absorb extra costs into their bid price and meet the expectations of sellers sparking activity amid the current market environment.
Another area of concern is the US-China tension which has escalated and is expected to only rise as the US reaches its Presidential Election. Whatever happens in the coming weeks and months, Hong Kong risks implication which could compound any negative sentiment from the National Security law, which prompted the US to revoke some trade and visa privileges for the city in response. However, most investors in Hong Kong consider that the new security laws will improve economic and political stability in the territory which could help Chinese capital to return to Hong Kong.
Movement in residential sales
Stepping away from commercial real estate, residential activity is experiencing cautious sentiment which is expected to continue and spill over into Q3. Nonetheless, we can see that local and mainland Chinese developers are continuing their active search for sizable residential sites to acquire. From recent first-hand sales and competitive bids for government residential sites, it is apparent that demand for scarce residential flats remains strong, pointing to a promising future for the sector in the long run. Should the COVID-19 outbreak ease globally and with more clarity around political and economic developments in the city, investors will positively reassess their strategies, which will help spur more activity in the market.
- Government Land Lot 1069 in Survey District No. 3 off Anderson Road, Kwun Tong, Kowloon, has been awarded to Art Champion Investment Limited (parent company: CK Asset Holdings Limited) at a premium of HKD4.95 billion (USD639 billion) or HKD8,015 (USD1,034) per sq. ft. on land value.
- Residential site New Kowloon Inland Lot 6591 at Kai Tak Area 4B Site 4, Kai Tak, Kowloon, was acquired by Top Family Group at a premium of HKD7.04 billion (USD908 million) or HKD12,250 (USD1,581) per sq. ft. on land value.
- Ho Choi Group’s retail shops portfolio was sold to a local investor at a premium of HKD1 billion (USD129 million).