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Forecasts for the Hong Kong real estate market this time last year were as bleak as the view from the peak that dominated the territory on one of the most polluted days.
It was hoped that political uncertainty, travel bans related to the Covid-19 pandemic and the UK’s decision to open the door to Hong Kongers holding British national overseas passports would eliminate billions in property valuations.
But the territory’s real estate market, not for the first time, has challenged predictions laden with destruction.
Although rents have fallen, Hong Kong’s April real estate bids by value have doubled in value, according to Property Registry data. According to estimates by real estate agency Centaline, in the secondary market house prices reach a maximum of 23 years. Average house prices are only 2% of all-time highs.
“Hong Kong is a unique market. There is a constant demand for the type of buyer for whom the price does not matter. Supply has always been limited. None of that has changed, ”said Derek Chan, head of research at real estate agency Ricacorp Properties.
It was hoped that the real estate market would be affected by a UK decision to allow a citizen-friendly path for the 3 million residents of the territory who had or were eligible for BNO passports.
In fact, last year about 310,000 BNO passports were issued, twice as many as the previous year. Some 153,300 Hong Kong people are expected to settle in the UK this year, according to a British Home Office study. Some of these BNO passport holders must have been active buyers in the UK.
To Hong Kongers, London must seem relatively attractive. The territory was the most expensive real estate market in the world last year, with an average house price of $ 1.2 million, or $ 1,987 per square meter, more than double that of London. In addition, its privileged residential property provides one of the lowest rental yields in the world, at 1.8%. This compares with the average yield of 3.8% in London at the end of last year.
Still, neither of these two factors matters much to the continent’s wealthy Chinese investors looking for a place to park their money conveniently close to home. Over the past decade, house prices in Hong Kong have gained more than 200%. Mainland buyers who take into account past yields return to the territory to fill the gaps left by locals.
Purchases of residential properties in Hong Kong by mainland Chinese buyers rose 40% in the first two months of this year. A recent push by Beijing to launch a wealth management connection between the mainland and Hong Kong should boost demand. Some continents are likely to have seen it as Beijing’s seal of approval for investing in Hong Kong.
“At current rates, house prices are expected to rise by up to 15% this year,” Chan said. He said it was notable that there was a demand from mainland Chinese buyers, although the borders remained largely closed between Hong Kong and mainland China due to the pandemic. “When the borders are reopened, there should be a dramatic increase.”
Hong Kong developers have been quick to take advantage of it. After exhausting new developments, Road King Infrastructure and Sun Hung Kai have increased the prices of their latest apartment lot by up to 11%.
However, in the stock markets, Hong Kong developers have been shunned for most of the past year, leaving them significantly undervalued. They trade at a significant discount to the net asset value, well above 50%, being considered burdened with political risks and exposed to a lasting drop in tourism in the state city.
On a closer look, however, the benefits of rising rental and property prices in the asset portfolio in mainland China have offset weak retail rents and empty hotels in Hong Kong. This allows investors to be exposed to central business property gains in major cities such as Shenzhen and Shanghai, minus the heavy debt burden of mainland developers.
Hong Kong developers are full of cash and have some of the strongest balance sheets among global peers. For example, CK Asset’s net gear – total debt versus total shareholder capital – is 4.8%, even lower than pre-pandemic levels. This compares to 98 percent for the continental pair Kaisa and 153 percent for Evergrande.
The failure of gloomy predictions over the past year has highlighted opportunities for opposing investors. They should take note of the Hong Kong developers.
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