RCA Insights

Hong Kong Takes a Breather For Now

By on December 26th, 2018

For quite a few years Hong Kong has defied the odds, commentators’ warnings of collapse, and gravity to post record price rises on the back of surging transactional volume. However, the last nine months has provided a pause at least in terms of the astronomical price growth many have come to anticipate.

As at the end of the third quarter of 2018 prices in Hong Kong were increasing by 4.0% year-over-year, putting it in the bottom third of major global metros tracked by the RCA CPPI. This is after prices had more than tripled over the last decade, so some element of a moderation was not unexpected.

While price growth has been more subdued in 2018, the profile and standing of Hong Kong has grown enormously within global markets in the last few years. Transactional volumes in the city following the Global Financial Crisis were remarkably stable at around US$20 billion a year.

In 2016 there was something of a turning point, with fourth quarter volumes passing US$10 billion for the first time. This momentum has continued with four of the last seven quarters above US$10 billion, reaching a peak of US$22 billion in the second quarter of 2018.

1812 Hong Kong pause MAIN_150-01

Hong Kong has moved from being one of the top 20 markets globally to now regularly being in the top five traded markets in the world, and number one in Asia Pacific by quite some margin in 2018.

Of course, Hong Kong’s strategic position and continued integration into China through the one country, two systems policy has been critical in this surge in investment volume, particularly since 2016. Flows from China have increased dramatically, particularly into the office and development site sectors, with over US$30 billion invested over the last decade — US$24 billion of that since 2016.

Other cross-border investors have to some extent been crowded out, with Singaporean and U.S. investors being the next most active, deploying less than US$10 billion over the last decade. But the focus on China shouldn’t detract from the fact that domestic investors have also increased their buying activity, with cross-border making up just over 20% of all activity in the last two years.

Can this level of transactional activity be maintained? With the Greater Bay Area initiative and ongoing policies aimed at making the movement of capital, goods and people between Hong Kong and the mainland continuing to progress, then we should continue to see Chinese capital invested. At present Hong Kong acts as a gateway for many Chinese companies to the world’s capital markets so the flow of money is unlikely to decrease.

However, while China is an important capital provider, it will be the level of domestic demand that will be key to Hong Kong’s continued place as one of the top markets for global investment activity.

David Green-Morgan

Managing Director, Asia Pacific

DGreen-Morgan@rcanalytics.com

David Green-Morgan is a highly regarded global commercial real estate expert with 20 years of industry experience. Before joining RCA in November 2017, he spent six years at brokerage firm JLL in Singapore, where he was responsible for their real estate capital markets research globally. Prior to that he spent five years at Cushman & Wakefield in Sydney as head of Asia Pacific research. David started his career at Investment Property Databank (IPD) where he was at the forefront of data analytics to benefit clients’ decision-making.