Here in Hong Kong, we are frequently asked - whether by overseas family, partners and clients, and even the media - how the coronavirus outbreak has affected our lives and our business. Our Managing Director, Nigel Smith, addresses some of those questions and concerns:
How has your day-to-day been affected by the outbreak? What kind of practical adjustments have you had to make?
It hasn’t been easy – there has certainly been an impact, both on our personal and professional lives. Children haven’t been going to school so there is added stress at home, and a lot of our staff have opted to work remotely which makes informal channels of communication a bit of a challenge. We’re normally a very collaborative office, so we’ve had to find new ways to adapt that culture to a work-from-home policy. We’ve put out guidelines of course, but it really comes down to maintaining a high level of understanding and empathy – some of us are more affected than others, so we have to bear that in mind.
What has been the impact on the real estate market? Is there any reason to be hopeful?
We’ve certainly been through a lot these last few months – owners, occupiers and investors have all been impacted, and many are reviewing their business strategy for the next 2-3 years in light of the ‘triple whammy’ of the trade war, protests and now the coronavirus. However, if the spread of the virus is brought under control this month, we expect prices to stabilize by around mid-summer. The latest reports state that the number of new cases in China is finally starting to drop, so we would expect Hong Kong to follow suit rather quickly. The atmosphere has calmed down considerably, and office staff – ourselves included – have shifted back to normal working operations.
Is there any upside or opportunity to be found during the recovery period?
Multinationals may come back demanding rental concessions or lower rents upon renewal, with rates falling by around 13% in the first half of the year in Central and Admiralty – this will likely stabilize in the second half. Occupiers should take the opportunity to renegotiate rental packages as they look at their plans over the next few years. For landlords, the opportunity is to work with tenants as partners, and help them make it through 2020 as they build towards a more resilient portfolio of tenants that can better meet the challenges of the future. What they have in hand now is a rare opportunity to attract new and different sectors – such as insurance, e-commerce, hotels, smaller asset management firms - as the markets will inevitably trend upwards again at some point. Some landlords might take the opportunity to divide up their floors during this time. In any case, Hong Kong will always be a supply-challenged market, and no matter how many vacancies there are, rents will hold.
What about the residential market – will there be a crash or cases of negative equity?
This is a question we hear a lot of - but no, it is not very likely, given the limited supply. The fundamentals of the market are strong, and the economic factors are very different now than they were back in ‘98 and ‘03. We’ve seen an increase in selling activity at 5-8 percent below market value, but the variance in discount rates is small. We hear of anecdotal cases where people are selling at lower than a 10 percent discount because they have decided to leave Hong Kong, and are capitalizing on their substantial gains accrued over many decades – but this is certainly not the norm, and doesn’t reflect the market itself.