The forecast for the Hong Kong real estate market at this time of last year was as grim as the view from the Peak overlooking the territory on one of its most polluted days.
Political uncertainty, travel bans linked to the Covid-19 pandemic and the UK’s decision to open the door for Hong Kong people with overseas UK national passports are expected to cost billions of dollars. dollars to real estate appraisals.
But the territory’s real estate market, not for the first time, has defied fatal predictions.
As rents fell, the value of Hong Kong’s real estate transactions in April more than doubled, according to land registry data. In the secondary market, house prices are on track to hit a 23-year high, according to estimates from real estate agency Centaline. Average home prices are only 2 percent below historic highs.
“Hong Kong is a single market. There is a constant demand from the type of buyer for whom price does not matter. Supply has always been limited. None of that has changed, ”said Derek Chan, research manager at real estate agency Ricacorp Properties.
The property market was expected to be affected by a UK decision allowing a favorable path to citizenship for the territory’s 3 million residents who hold BNO Passports.
In fact, around 310,000 BNO passports were issued last year, double the amount of the previous year. Some 153,300 Hong Kongers are expected to move to the UK this year, according to a UK Home Office study. Some of these BNO passport holders must have been active buyers in the UK.
For Hong Kong people, 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 foot, more than double that of London. In addition, its prime residential property offers one of the lowest rental yields in the world at 1.8%. This compares to the London average of 3.8 percent return at the end of last year.
Yet neither of these two factors matters much to wealthy mainland Chinese investors looking for a place to park their money close to home. Over the past decade, house prices in Hong Kong have increased by more than 200 percent. Continental buyers, concerned about past returns, return to the territory to fill in the gaps left by the inhabitants.
Purchases of residential properties in Hong Kong by buyers from mainland China 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 is expected to push demand higher. It is likely that some mainlanders will see it as Beijing’s seal of approval to invest in Hong Kong.
“At current rates, house prices are expected to rise 15% this year,” Chan said. He said it was remarkable that the demand from buyers from mainland China was there, even though the borders remained largely closed between Hong Kong and mainland China due to the pandemic. “When the borders reopen, there should be a dramatic increase.”
Hong Kong developers were quick to take advantage of it. After selling off its new developments, Road King Infrastructure and Sun Hung Kai have raised the prices of its latest batch of apartments by up to 11 percent.
Yet 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 net asset value, well over 50 percent, being seen as laden with political risk and exposed to a sustained decline in tourism in the city-state.
On closer inspection, however, the benefits of soaring rents and real estate prices in their mainland Chinese asset portfolio offset weak commercial rents and empty hotels in Hong Kong. This gives investors exposure to the earnings of central commercial properties in major cities such as Shenzhen and Shanghai, minus the heavy indebtedness of mainland developers.
Hong Kong developers are brimming with cash and have some of the strongest balance sheets among their global peers. For example, CK Asset’s net indebtedness – total debt to total equity – stands at just 4.8 percent, even lower than pre-pandemic levels. This compares to 98% for its mainland counterpart Kaisa and 153% for Evergrande.
The failure of gloomy forecasts over the past year has underscored opportunities for contrarian investors. They should take note of the Hong Kong developers.
