Investment in Hong Kong Commercial Real Estate Fell 27% in 2018

Investment in Hong Kong’s commercial real estate market dipped 27 percent in 2018, compared to the previous year, reaching a 12 month total of HK$126 billion ($16 billion) despite a furious start to the year, according to a recent report by Cushman & Wakefield.

From January through June, investment in the city’s commercial real estate assets reached HK$71.9 billion, but slid to HK$54.1 billion in transactions during the second half of the year. This trend was a reversal from the market’s 2017 performance, when the last six months of the year generated 67 percent of annual investment,

“Despite the steep decline in 2H, strong momentum early in 2018 provided a cushion for the full year,” said Reed Hatcher, head of research at Cushman & Wakefield in Hong Kong.

The Golden Half

At the start of 2018, most metrics showed Hong Kong’s real estate market on track for a record showing. According to a report by CBRE published last year, the first half of 2018 set a new high in commercial property investment activity, helped along by rising office rents across the city’s prime commercial districts.

“The Hong Kong Grade A office market observed the strongest first-half of a year since 2015, with the net absorption rate reaching 1.5 million square feet, already surpassing the rate of 1.2 million square feet for the whole of 2017,”said CBRE, adding that, “Overall office rents and capital values are at an all-time high,”

Credit Party Comes to a Close

Just as the results of the first half went public, a credit crackdown from authorities in Beijing reduced a flow of mainland investment into Hong Kong to a trickle, slowing and by some measures wiping out the growth achieved during the first half of 2018.

The anxiety apparent in developer stocks also showed up in leasing of Hong Kong prime commercial space. Vacancy rates in Hong Kong’s Central district climbed close to 3 percentage points quarter on quarter to 7.1, and the correction in F&B rents continued in the third quarter, with average rents falling by 0.6 percentage points to 2.2 percent despite growth in dining spending, according to Cushman & Wakefield.

The drop in demand became more apparent in the last quarter, when net absorption of Hong Kong’s office market was -11,744 square feet, the first time the figure has been in negative territory in two years, said Cushman & Wakefield

Mainland Companies Lose Their Hunger

The slowdown has in large part been driven by mainland companies decreasing appetite for prime real estate in Hong Kong. Chinese companies accounted for just 30 percent of all new lettings in Central district in 2018, down from 48 percent in 2017, according to JLL.

After watching mainland occupiers bid up office rents in Central in recent years, China’s HNA Group in September surrendered its lease of eight floors in Hongkong Land’s Three Exchange Square when it couldn’t afford the HK$12 million per month in rent. Last month the landlord ended up suing one of the mainland’s largest conglomerates for HK$8.3 million in unpaid fees related to the ill-fated lease.

Despite that high-profile failure, grade A office rents in the city’s prime areas remained essentially unchanged in the second half of the year, despite the slight increase in vacancy. Between June and November rents climbed one percent in Central, two percent in Kowloon Bay, and eight percent in Tsim Sha Tsui, while they dropped five percent in Causeway Bay.

While retail rents in Hong Kong increased 12 percent in the first half of the year to an average of HK$1,605 per square metre, they remained essentially flat from June to November, according to government data. Investment values for retail space, similarly, climbed eight percent in the first half of the year, only to drop 8.2 percent through November HK$429,573, wiping out the gains of the first two quarters.

The disruption in the commercial market is mirrored in Hong Kong’s residential markets, where prices fell for the first time in 29 months in October, days after Hong Kong banks announced hikes to their benchmark lending rates.

A New Normal?

Investment banks predict the dip may be short-lived. JP Morgan said it expects home prices in the city to rise 5-7 percent after a “short-lived” 15 percent correction, supported by favorable liquidity conditions. The New York-headquartered firm, however, warned liquidity conditions could tighten if mainland companies expand their borrowing in Hong Kong to offset domestic credit tightening.

Nicole Wong, Regional Head of Property Research at investment bank CLSA, said Hong Kong property prices may bottom within the next two months and then rebound by up to 15 percent but will remain 2 percent below their peak in the best of cases.

Others, are not so certain, forecasting that the credit crunch will keep pushing prices and sales down this year. Prices of commercial assets are likely to keep dropping, said Zhou Songming, vice-president of EBA Asset Management, in a statement referenced by the South China Morning Post. “By next year, I expect that there will be much more for-sale assets with lower asking prices.”