How Hong Kong real estate will be impacted by China's recovery

China is forecast to overtake the US as the world’s largest economy by mid-2030.

Hong Kong’s economy showed signs of recovery with its GDP returning to 2.8% QOQ growth in Q3 2020 after five consecutive quarters of GDP contraction. This was largely propelled by China’s GDP rebound offset from its stabilisation of the pandemic. For instance, China’s GDP grew 4.9% YOY in Q3 2020, compared to 3.2% YOY in Q2 2020.

China could potentially overtake the U.S. in the mid 2030s to become the world’s largest economy, according to Oxford Economics’ data. The opening up of China’s financial industry and the Greater Bay Area (GBA)’s initiative should lead Hong Kong to further tighten its economic ties with the mainland and benefit from China’s growth.

In the latest Hong Kong Policy Address 2020, the government plans to expedite the GBA cross-boundary wealth management connect scheme, as well as to promote Hong Kong’s REITs market, private equity funds and family office businesses. These proposals should bring new impetuses to Hong Kong’s economy and reinforce its status as a financial centre.

Here are the implications to Hong Kong’s property market, according to Colliers:

Office

The strong rebound in China should help to lead the economic recovery in Hong Kong in the next one to two years. According to Oxford Economics’, China and Hong Kong’s GDP are expected to grow by 7.8% YOY and 4.4% YOY respectively in 2021. An improving GDP should bring in more stability for Hong Kong’s Grade A office rental market, which trends very closely with the city’s GDP performance.

Meanwhile, the outcome of the U.S presidential election with Biden’s victory could point to a more predictable and strategic China policy, as well as a potential improvement in the overall business confidence, which would likely benefit Hong Kong’s office leasing demand.

We believe one of Hong Kong’s key strengths is serving as a global financial gateway for overseas capital entering and exiting Mainland China and the GBA. Hong Kong and Mainland China’s closer business ties shall offer more business opportunities, and hence office demand from across the border, especially from the finance, wealth management and insurance fields.

We recommend landlords develop sophisticated client engagement strategies to build better relationships with the potential PRC occupiers, which we believe will be one of the key demand drivers in 2021.

Industrial

According to the government’s statistics, Hong Kong's exports growth bounced back to positive again in September 2020, with a YOY increase of 10.3%. This was mainly driven by an improved external trading environment amid the accelerated growth of the Mainland’s economy. The recovery of trading volume is particularly noticeable in China, with Hong Kong’s total export to China boosted by 17.6% YOY during the same month.

Whilst Hong Kong derives most of its trading activities from China, it is also China's third-largest trading partner after the US and Japan. In this respect, China’s accession to the new Regional Comprehensive Economic Partnership, signed on 15 Nov 2020 as the world’s largest regional freetrade agreement, with 14 other Asia-Pacific countries including Japan, South Korea, Australia and New Zealand, should strengthen its supply chain, bolster economies by reducing tariffs, and ultimately improve the trading prospects and leasing demand for Hong Kong’s logistics and industrial facilities.

Hospitality and Retail

Although China’s retail spending has been lagging the recovery of investment and export activity post-COVID-19, the latest data saw signs of a consumption recovery. In October 2020, online services sales (e.g. travel and hotel bookings) spiked by 23.5% YOY, while the urban employment increased by 15.6% YOY, the strongest recorded since 2013. This all suggests a very solid future mainland consumption power.

Hong Kong is highly reliant on large volumes of business and leisure travellers from out-of-town. Mainland Chinese tourists used to be the leading source of visitors for Hong Kong, which accounted for almost 80% of the city’s visitor arrivals.

There is a high correlation of Hong Kong's retail sales performance and the visitor's arrival rates from China to Hong Kong. As such, reopening the border and resuming free travel is crucial for the recovery of Hong Kong’s hospitality and retail sector. We believe the GBA region should be the first step in opening the border. Retailers and hoteliers should strategise ahead for operations plans and marketing campaigns.

Investment

In our earlier published report Mainland Chinese demand to stimulate opportunities for Hong Kong SAR’s real estate sector, we mentioned that the investment demand into Hong Kong’s property market from Chinese capital had regained momentum in recent months.

According to RCA, Mainland Chinese capital accounted for 60% of the cross-border transactions year-to-date. We believe that once the Hong Kong-Mainland China border reopens, it will likely give further boosts for Chinese capital to re-enter Hong Kong’s property market.

Meanwhile, the fiscal stimulus under Biden will likely depress the U.S. dollar, while adding upward pressure on the Chinese RMB. Notably, RMB had appreciated by 9.6% since its last trough in end-May 2020. The potential upward pressure of RMB should make the property pricing in Hong Kong more attractive to Chinese or RMB-dominated investors.

We recommend investors focus on residential sites, strata-office for end-users, strategic industrial assets and en-bloc commercial buildings as Chinese buyers are likely continue to eye opportunities in these asset types