, Hong Kong

Hong Kong residential prices to fall a further 5% in 2021: S&P

But residential revenues are still more resilient than rental revenues.

Hong Kong's limited housing supply may help save the city's residential market from a sharp correction amid COVID-19 fallout, according to a report by S&P Global Ratings.

"We anticipate Hong Kong residential property prices will fall a further 5% in 2021 after sliding by about 7% as at end October 2020 from their peak in June 2019," said S&P Global Ratings credit analyst Edward Chan.

In an unlikely turn of events, S&P says conditions will be tougher for landlords than developers, who are usually more susceptible to cyclicality. Retail and commercial properties might have a harder time recovering from prolonged economic stress in the city. Even without lockdowns and curfews as elsewhere, comprehensive pandemic measures in Hong Kong have exacerbated pre-existing economic problems. The special administrative region's GDP has shrunk for a fifth straight quarter, on year-on-year comparisons as of Sept. 30, 2020, and unemployment stands at a 16-year high of 6.4%.

Here’s more from S&P:

Given the jobless rate may not have peaked, we see further weakness in residential prices. During the past two decades, Hong Kong property prices tended to bottom only when the jobless rate had peaked or was about to peak.

A shortage of housing remains a safeguard against larger price plunges, in our view. Annual private housing completions are down 30% during 2010-2019 compared with the previous decade, though the population has been rising. Vacancy rates have been falling, and many developers have delayed launches this year amid uncertainty. We believe transaction volumes in the primary residential market will rebound in 2021 as social distancing measures gradually ease, and sales launch on new developments.

The expected rebound in home sales volume should shield Hong Kong developers from weaknesses in their rental portfolios. In our view, the situation is tougher in the retail and office segments of Hong Kong's property markets.

We believe landlords will continue renewing most of their retail leases at lower rates (negative reversions) in 2021. Retail sales have been hit hard by the pandemic, reduced tourism, and high unemployment. Rated landlords with high exposure to high-end shopping are more exposed, in our view, than peers focused on the mass market.

Rising office vacancies point to negative rental reversions in 2021. In particular, spot office rents in traditional prime business districts, such as Central, have dropped by more than 20% from a peak in early 2019 and likely have further to go. Non-prime office areas have held up better, likely due to their lower base.

Our sensitivity analysis shows rated landlords have adequate rating buffers. To trigger potential negative rating actions, their Hong Kong retail and office rental income would need to drop to at least their fiscal 2015 levels. In our view, this is unlikely to happen because negative office rental reversions for prime office properties only began in the third quarter of 2020. For example, Swire Pacific Ltd. was still recording positive office rental reversion as at end September 2020, and Hongkong Land Holdings Ltd. only lowered new rents in its Central office portfolio in the third quarter of 2020.

"Rated property companies have buffers to make it through another year without a change to credit quality," said Mr. Chan.

COVID-19 has sparked a secular shift in office demand globally. In our view, work-from-home (WFH) will continue to be adopted, to a lesser capacity, even after the COVID crisis has passed.

This supports our negative view on global office space. However, in Hong Kong, the WFH impact could be slower and lower due to its density of space and world-class transportation. Even with these distinctive factors supporting incentives to work in the office in Hong Kong, a global paradigm shift might still change the local landscape.

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