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Hong Kong Real Estate – Retail Homes, Offices and Properties – Face "Tsunami Crashes"


At first, the protests and now the coronavirus collide with the most expensive real estate market in the world.

By Nick Corbishley, for WOLF STREET:

The world's most expensive housing market in terms of affordability for a middle-income household is in Hong Kong, which also has the highest proportion of financial assets relative to the planet's GDP. That market is under great pressure, as it recovers from months of practically continuing political protests, the ongoing trade war between its two largest trading partners, China and the US. UU., And now the recent arrival of the new coronavirus.

The values ​​of the Class A office buildings in the city fell last year by 7%. It was the first fall since 2008, according to the commercial real estate services company JLL. The prices of the offices as a whole ended the year at its lowest level since the second quarter of 2018. "There was a lot to deal with in 2019, but the most important thing is that the market had expanded for 11 years," according to The report. "At one point, that had to change."

The total transaction value of offices and retail properties as a whole fell 12.9% last year to HK $ 49.6 billion (US $ 8.9 billion), according to Bloomberg Intelligence By December, Class A office buildings registered a vacancy rate of 6%, the highest level since April 2010, when the city was struggling with the subsequent effects of the Global Financial Crisis. Segment rents also fell 3.4% in the year.

But that pales in comparison to the reverberations felt in the retail sector, whose sales decreased by 19% year-over-year in December. according to Hong Kong Department of Census and Statistics. Luxury goods sales, a large part of Hong Kong's retail industry, fell 37%. Many retailers have gone to closed or closed stores, resulting in a vacancy rate in the main shopping areas of 9%, the highest in five years.

Most of the blame lies with the political crisis that broke out last spring and intensified in a crescendo of violence in the summer that decimated tourist traffic, particularly from mainland China.

Then came the Covid-19 outbreak, which forced the Hong Kong authorities to close six of the city's borders with the mainland. The average daily tourist arrivals dropped 97% to 3,000 at the beginning of February than 200,000 a year earlierwhile many local residents have reduced all purchases except essentials, drowning retail demand.

Commercial property owners are so scared by the magnitude of the slowdown that some have begun to provide rental assistance to help their tenants weather the storm. Henderson Land Development, the third largest developer in the city, offered to reduce rent by 60% to help retailers. Hong Kong billionaire of toys Francis Choi Chee Ming offered to cut 44% of rents in a space of 15,000 square feet in 2000 Plaza in Causeway Bay, after Prada refused to pay HK $ 9 million in monthly charges.

Keith Wu Shiu-kee, CEO of Sunlight Real Estate Investment Trust, a unit of Henderson Land Development, believes that the impact of the virus on retail sales is likely to be much worse than during the protests, and noted that in the second half of 2019 in At least some tourists from the continent kept coming. He estimates that the drop in total retail sales this year will be "clearly double digits." said. "It remains to be seen if it is 30%, 40% or 50%."

Hong Kong's residential real estate sector has so far withstood the storm a little better, with housing prices falling 6.1% from a record high in June, according to the leading index of Centa-City. The index even recovered slightly in the four weeks until February 9 despite agreeing with the outbreak of COVIN-19 and the adoption of increasingly extreme measures by the governments of China and Hong Kong to contain its spread.

It is likely that the effects of the virus take a while to feed on real estate prices and transactions, as happened with the political crisis in Hong Kong that began last March, but which did not hit the real estate market until summer. Once the effects begin to be felt in the real estate market, it is the luxury segment, which depends largely on demand from mainland China, which will bear the weight of falling prices, JLL notes.

Hong Kong's real estate sector has experienced an almost permanent boom since 2003, when the consequences of the SARS virus brought it to a minimum of several decades. Since then, housing prices have multiplied fivefold, suffering only the shortest falls in 2008, 2011 and 2015. Today, prices are out of everyone's reach, except for the better-off residents and investors.

the annual Demographic study of international housing affordability, which ranks 92 major markets worldwide based on the affordability of middle-income households, ranks Hong Kong at the top (with a score of 21), well ahead of number 2, Vancouver, Canada ( score of just over 12), and Number 3, Sydney, Australia (score of just under 12).

The chart below shows Hong Kong between meters with populations of more than 5 million, which excludes Vancouver, San Francisco and other less large hot spots:

These and many other world cities have experienced insane housing bubbles, largely driven by the unprecedented easing of the central bank, however, in the past 10 years, none of them have been about to strip Hong Kong of the dubious honor of being the least affordable real estate market in the world.

That market is about to prove its resistance. Prices in the luxury sector could fall as much as 20% this year, says JLL. Not everyone agrees. According to a Bloomberg Article With the optimistic title "The prices of Teflon homes in Hong Kong are virus-proof," the consequences for the residential real estate sector are likely to be minimal, at least compared to the consequences for the commercial real estate sector.

The government is also desperately trying to reassure potential homebuyers and increase market demand by loosening the rules of the loan-to-value ratio (LTV) of the mortgage. It is also about to unveil According to the secretary of finance, Paul Chan Mo-po, his biggest budget deficit to protect the economy of the city from "tsunami-type shocks." Banks are also reducing the slack of mortgage borrowers.

But it may not be enough to save the world's most expensive real estate market from a very difficult 2020. As the Bloomberg article even acknowledges, if there is "a drastic worsening of the economy," the "Teflon houses" in Hong Kong may not be. Pretty virus proof after all. By Nick Corbishley, for WOLF STREET.

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