The most important source of inbound investment — mainland China — has vanished, with huge ramifications for CRE.
By Nick Corbishley, for WOLF STREET:
The Hong Kong government’s Land Office did something rather unusual. On May 13, it withdrew a major commercial plot it had put up for sale at the site of the city’s former airport at Kai Tak. The Land Office had received four bids for the plot, including from Sun Hung Kai Properties, Hong Kong’s biggest developer by value, but none of them came close to the government’s undisclosed reserve price, prompting the Land Office to pull the offer.
The withdrawal of the lot, only the fourth since January 2018, came after appraisers had lowered estimates of the land parcel’s value by 20% to a range between HK$6.38 billion ($820 million) and HK$10.44 billion ($1.35 billion). But some market insiders say the government had failed to take this sufficiently into account.
“The government overestimated the [parcel’s worth],” said Charles Chan, managing director of valuation and professional services at Savills. The market has corrected, but the [reserve] price was not in line with the market”.
In another part of Kai Tak, another land deal told a similar story. Goldin Financial Holdings Ltd., a Hong Kong-based investment holding company whose shares have fallen nearly 50% in the past six months, had to accept a loss of 21% or $335 million in its sale of an undeveloped residential land parcel it had bought in 2018. It was a desperate effort to raise cash.
“Considering the preliminary stage of development of the property and the significant capital required for the project, the directors adopted a prudent approach to retain more cash for the group’s existing business, against the uncertain outlook in the property market and the overall economic downturn in Hong Kong,” Goldin said in a bourse filing.
Hong Kong’s commercial property sector has been hit by a quadruple whammy over the last couple of years. First, Beijing imposed capital controls on money flowing out of China, much of which had been pouring into Hong Kong real estate. Shortly after that, trade tensions between the U.S and China began escalating, leaving Hong Kong stuck in the middle. Then the city was rocked by non-stop student protests. And now, to cap it all off, there’s the virus crisis.
Hong Kong’s health authorities have managed the threat posed by Covid-19 far better than many other global cities, largely due to the lessons gleaned from previous outbreaks, including the 2003 SARS episode. The city has so far only registered four deaths from Covid-19. But the economic impact of the partial lockdown and the closure of most of its land borders with China has nonetheless been brutal.
The city is already in the throes of its deepest recorded recession, after notching up three consecutive quarters of falling GDP. The 8.9% contraction suffered in the first quarter of 2020 was the biggest since records began.
And the most important source of inbound investment as well as demand for the city’s luxury retail sector — mainland China — has effectively vanished, with huge ramifications for the city’s commercial real estate (CRE).
In the first three months of 2020, there were no recorded deals at all by cross-border investors, according to CBRE Group Inc., which tracks deals over HK$77 million ($10 million). Mainland Chinese buyers, who largely drove the multi-decade luxury real estate boom in Hong Kong, have not only stopped buying luxury homes altogether, but they’ve also stopped buying commercial real estate, for the first time since 2009.
CRE investment has fallen across many of the world’s regions so far this year, but few areas have been hit as hard as Asia Pacific. Investment in the region in the first quarter tumbled 50% year-over-year, to US$21.3 billion, the lowest level since the Global Financial Crisis, as investors try to conserve cash, according to Real Capital Analytics. The volume of land deals also slumped by 37%.
Within the Asia Pacific region, Hong Kong has been hit the hardest. Of six mature property markets, Hong Kong fared the worst, with transaction volumes collapsing by 74% in the first quarter, according to JLL. That compares with falls of 68% in Singapore, 61% in mainland China and 28% in Australia. In contrast, transaction volumes in Japan remained more or less flat while in South Korea they actually rose by 32%.
In Hong Kong office vacancy rates for class A properties have already reached 7.3%, just one percentage point off the 8.2% peak registered in June 2009. Office prices are also feeling the strain, slumping to HK$23,385 per square foot in the first quarter, down 9.3% from a peak in September 2018, according to Colliers.
Harsher reverberations are being felt across the retail property sector. On some prime shopping streets, rents have crashed to their lowest levels in 12 years. On Russell Street, once one of the most expensive retail stretches in the world, average rents plunged 27% year-over-year in the first quarter, according to the Wall Street Journal.
This is largely due to the fact that Chinese tourists, long the mainstay of Hong Kong’s all-important luxury goods sector, have gone AWOL. Even before Covid arrived, the pro-democracy movement had scared many of them away. Covid did the rest. In April, with social distancing rules tightened and border controls with mainland China still in place, total visitor arrivals slumped “almost 100%” to 4,125. In the same month of 2019, there were 5.57 million arrivals.
In the almost total absence of foreign visitors, Hong Kong’s retail and hospitality sectors have imploded. In March, retail sales plunged by 42% year-over-year, according to Hong Kong’s Census and Statistics Department. That came on the heels of a 44% fall in February. For the first quarter of 2020, the value of total retail sales fell by 35% compared with the same period in 2019. Sales of luxury goods — a huge part of Hong Kong’s retail industry — in March slumped by 73%.
For the owners of retail properties and hotels, the pain is steadily growing. In the last two months, many retailers have gone under or closed stores, resulting in a vacancy rate in core shopping areas of 9%, the highest in five years. Many owners have had to offer their tenants sharp reductions in rent. Capital values for retail have also slumped 14% since the end of last year, to HK$33,964 per square foot. That’s 27% down from the peak of HK$46,344 per square foot reached in March 2014. But in those days the city’s tourism industry was booming. Today, it doesn’t even exist. By Nick Corbishley, for WOLF STREET.
A big driver behind soaring rents — the “Airbnb effect” that removed countless properties from global cities’ long-term rental markets — reverses. Read… Airbnb Gets Disrupted. Hosts, “Super-Hosts” Try to Survive. Apartments in Prime Locations Suddenly Flood Rental Market
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“The government overestimated the [parcel’s worth],” sounds like my annual argument with the assessors office.
Don’t stop arguing with your assessor’s office!
can HSBC be far behind – hope they don’t have to actually mark to market those commercial loans
using fabricated numbers makes accounting much easier to digest
HSBC too big to jail even when they admitted to the Fed what crimes they did. The new normal of saying, ya, you got me.
But we will crash the economy should you prosecute us.
HSBC Geneva branch .. the Herve Falcianni fiasco ..
No way did anyone sneak files out .. the files were given to Falcianni .. to sell to relevant governments .. for profit .. so as to divest the wealthy tax evaders of their monies ..
“Look here’s proof.”
It did not work !!
The HSBC & who ever else .. in collaboration .. these feeble minds .. concocted this great money grab plan .. which failed.
I think that only the Greek government was silly enough to give over money for the files .. so as to recoup tax revenue.
You say .. HSBC too big to jail .. makes me wonder if the Fed really cared ??
Christine Lagarde ..
The ‘Greek files’ came into her procession.
Stolen good !!
She offered them to the Greek government for a price !!
Stolen goods .. when in receipt of stolen good .. said recipient must immediately inform POLICE.
And she did not.
The Greek government .. upon being propositioned to take procession of said stolen goods should have immediately called POLICE.
And they did not.
How many crimes & how many criminal minds ??
Any law abiding court could only dismiss any charges.
How would jailing bank execs crash the economy? They are not the bank.
Probably a lot worse. Nobody tells the truth as decades ago, they found that it crashed when you did.
I find their is a great deal more going on this time with trust in quality as well. When you don’t check quality control at the source, then too late you are stuck with it.
When you buy a shovel and expect it to be strong and it bends on you, chances are, either the steel is poor or they missed the part of heat strengthening the metal. Again, too late, can’t send it back to China or some other country that’s it’s made in.
Funny you mention that. I grabbed a nice looking Stanley fiberglass shovel at Wally world the other day. It snapped into when I put some pressure on it. I’m so tired of this knock-off junk being pushed on me while paying what seems over-priced to start with. It’s all a scam by our darling giant too big to fail retailer.
We are a year into a 5 yr lease in HK… we have a 60 break that can be exercised at anytime after the first year.
The Landlord has reduced rent by 10% due to the bad economy. We have been pushing for more – he is resisting.
A couple of months ago we tested the market and found that we could not find comparable space at a lower rent.
We are a good tenant and have been in the same office for years… so no doubt we are got a favourable rent to begin with….
I read this article on May 12
Hong Kong’s major landlords of premium office space in Central are cutting rents by more than a third
https://www.scmp.com/business/article/3083810/landlords-central-slash-rents-more-third-vacancy-climbs-six-year-high-amid
I passed this to a property agent and asked for an update on the market:
The heading of news is eye catching and it showed you a few example in top grade A buildings which the rental is super high. However, not all of the landlords of grade a buildings decrease the rent in same way.
Futhermore, for those of grade b and grade c buildings, we don’t see they decrease so much.
She sent over more listings and the rental rates are no better than what we are paying so we are not moving any time soon.
We are leveraging our break option to try to get the landlord to offer a further reduction to be applied over the next 6 months.
The HK economy has been brutalized… and surely rents have to fall dramatically — but so far the office market remains surprisingly resilient…
I absolutely love visiting Hong Kong as a tourist. I would hate to live there unless I am one of those people lucky enough to be on an expat package living around Repulse Bay ….. or the Peak …. or a nice apartment around Soho/Mid Level Escalators.
I would have guessed that Kam Shan Country Park was more to your liking
Colony Capital defaulted on $3.2B in loans last week, secured by hotels and healthcare properties, and hardly a peep from the media. I guess nobody wants to talk about empty hotels and soon to be empty nursing homes.
Nursing homes wont be empty. A lot of Covid survivors need to stay in a nursing home and the average stay under normal circumstances in a nursing home is not exactly long term so in a year or two they would be totally refilled even if everybody died.
In a couple of states the nursing homes are the hot spots for Covid. Nobody wants to go to a nursing home now.
My sisters mother in law Angela, is in a very nice nursing home.
At least once a month residence are confined to their room for the duration ..
‘What duration,’ you ask ??
They say it is a contagious gastrointestinal infection.
In reality it is food poisoning.
I don’t know how different US States are handling this, but the big problem nursing homes have here (and we have plenty of them) is right now they are not allowed to take any new patients even if they have the spare capacity. The only exception allowed is for those patients who need 24 hours supervision because they may harm themselves or others.
This is a big problem because most (over 70%) nursing homes are run by non-profits whose main source of income are the fees paid for by the State or insurance companies. How many will go bankrupt we’ll know in the future. Another disaster made worse by politics.
Hotels are another matter completely: as the world starts re-opening watch out for clocherisme.
The European Commission announced, to much fanfare, the re-opening of all internal EU borders in June, with Wednesday 3 as the tentative date. Now many countries, led by Germany, are backpedaling and threatening to put France, Italy, Spain and Portugal on “blacklists” that include long quarantines and other restrictive measures.
This has absolutely nothing to do with “containing” the epidemic itself: if that were true regular flights between the EU and Iran (whose internal situation is a big question mark at the moment) wouldn’t have restarted three weeks ago already.
But this has a lot to due with not-so-stealthily incentivating domestic or nearly-so tourism: after all tourism was worth 8.6% of the pre-crisis German GDP and 15.4% of the Austrian one. Every German citizen that is prevented from vacationing south of the Alps this Summer is thus expected to spend his hard-earned euro in Lindau, Reutte or Rostock, not in Malaga, Portimão or Salò.
Expect US States to do exactly the same, albeit differently from the EU the Federal government can intervene and stop this farce at any moment by executive order,or merely by threatening to withold money.
How many will have enough capital behind them to reopen ??
Regarding nursing homes… my take is they will probably survive, albeit the image hit they took over the past three months will be felt. A big problem could be the lawsuits: they have already started in Italy and I am honestly surprised ambulance chasers in the US aren’t on the case yet. As my brother put it “Plenty of folks around for whom grandpa was a nuisance at best when alive but now that he’s dead he’s a potential goldmine”.
Hotels… we can just wait and see. My take is that Europe will completely re-open internal borders in July at latest and it will be the litmus test for the entire world. But those big-spending Chinese tourists aren’t coming back for a loong time.
Well. That will hurt certain countries, such as Portugal, Italy, Greece and Spain more than others I would guess.
“On Russell Street, once one of the most expensive retail stretches in the world, average rents plunged 27% year-over-year in the first quarter, according to the Wall Street Journal.
This is largely due to the fact that Chinese tourists, long the mainstay of Hong Kong’s all-important luxury goods sector, have gone AWOL.”
And Red China is a Communist country??
“motorcycle guy” quoted “Nick Corbishley”:
> Chinese tourists, long the mainstay of
> Hong Kong’s [ luxury goods… ]
As I understand it, business in China
is mostly “informal”, tax-free;
— the so-called “communism” is a façade —
in practice, America is more “communist”.
Mostly, it’s “wrong thought” and/or
“thieving junkies” that aren’t tolerated.
There is a big luxury goods tax in China … that’s why they used to load up on LV bags etc… in HK (no tax)
The demonstrators are pro-independence but i wouldn’t call them pro democracy when you see how they behave with people who think differently.
Granted it’s supposed to be a serious topic, but I just can’t get over the fact that the story includes a quote from a guy named Charlie Chan. Sure turning out to be a long strange journey in a weird world.
Char…one note about this thing you call “democracy”…a self imposed trap I call “The Chocolate Donut Tax”. You are always in a minority of one form or another, and thus a target. Their behavior is exactly democratic.
I don’t think the consequences will be severe – it is hard to predict. Maybe prices will rise up to the sky and maybe they will drop down. Interest rate in real estate dropped drastically the other month but for now as may be seen it is starting to grow gradually to the previous levels (as before the Coronavirus).
Hi Wilf,
Can you cover the southern California (LA) similar to the bay area, please. A lot of realtors and mortgage brokers are saying that the home sales are higher now. Just wanted to make you laugh a little. :)
Educated but poor millennial,
In three days, when the data is released, I’m going to discuss labor force and employment numbers in California. They were already ugly in March. They’re going to be super ugly in April. I might not cover all of the Southland, but will cover the counties of LA and San Diego with a chart. This will likely show a big drain not only of jobs but also of people in the labor force as they’re leaving. This happens in every crisis because coastal California is too expensive to stick around when you’re not working. So who is going to rent of buy all these properties?
The other day, I talked to a guy at Google about some ad stuff. They’re all working at home. But rather than stay in the Bay Area where he used to live to be near Google’s Redwood City office, he moved back home to mom and dad in St. Louis, and that’s where he was WFH. This is now happening everywhere.
So be patient. Let this play out. Nothing is going to happen overnight.