For China and Hong Kong, the near future is extremely challenging for real estate investors; however, both markets have great potential for longer-term investors and overseas capital is seen as waiting on the sidelines for the opportunity to invest.
The ULI Asia Pacific Summit, held in Hong Kong in August, asked a panel of experts what was next for China’s property market. The residential development market in particular has been challenged, with restrictions on lending, defaults among developers, and falling sales.
Peter Burnett, managing director of Standard Chartered Bank (Hong Kong), outlined the current market situation, which has emerged since the Chinese government introduced its “three red lines,” which restrict the amount of money that developers can borrow. Burnett said that these measures have constrained further development.
However, he said, recent regulatory and policy changes seemed to support the sector, such as banks offering special loans to finance the completion of development projects. “So, we’ve gone from regulating to actually providing some support,” he said. “To some extent, confidence has returned, but I wouldn’t say it’s bubbling with confidence just yet.”
Goodwin Gaw, chairman and managing principal at Gaw Capital Partners, said that the main difference between China and other major economies is that inflation is relatively low and the country’s fiscal policy is loose; however, foreign investors were waiting to see what practical measures will be taken to stimulate the economy.
Claire Tang, co–chief investment officer, Asia Pacific, and head of Greater China at LaSalle Investment Management, expressed confidence that China was “getting better in terms of coming out of COVID” and that global investors were taking a “fairly balanced” view of the economy. She said that investors were looking toward more resilient sectors, such as logistics and multifamily residential. Tang also said that finance costs had fallen about 150 basis points for recent loans on LaSalle projects in China.
Hong Kong’s long isolation from the rest of the world, with border closures and strict quarantine, has led to a number of residents moving elsewhere, especially to Singapore, which has been open to visitors for some months and has removed most of its COVID restrictions. Hong Kong’s gross domestic product (GDP) is forecast to be flat this year as restrictions continue.
Nonetheless, the panel expressed confidence about the city’s longer-term future once COVID restrictions were removed. In particular, China’s belief that Hong Kong should be China’s financial gateway to the world and its role in the Greater Bay Area would benefit the city, they said.
Hong Kong’s status as a gateway from China protects it from competition with Shanghai, said Gaw, and this was encouraging mainland businesses to the city. “We see China securities houses and investment banks hiring in Hong Kong,” he said. He also said that these companies were likely to buy residential assets for staff use in the future.
Burnett said that expats had left Hong Kong to move to other locations; however, companies had not and that he expected many individuals to return when restrictions loosened, with the proviso that the longer restrictions stayed in place, the harder it would be to get expats to return.
The Hong Kong government is pegging much of the city’s future success on its role as part of the Greater Bay Area (GBA), which comprises nine mainland cities, plus Hong Kong and Macau. Hong Kong’s role in the GBA is seen as the international capital location, a “free port” for the region, Burnett said. The city’s services sector will have an important role to play in the GBA, he said. “If you can take what these businesses do in Hong Kong for 7.5 million people and replicate it in the GBA, that is theoretical growth potential of 10 times, with the GBA’s 75 million population.”
Gaw said that a key driver of the success of the GBA would be its existing cultural and language links. People in Guangdong speak Cantonese rather than Mandarin, so there is no language barrier for Hongkongers who might not be totally fluent in Mandarin. Furthermore, the cultures are linked. “Integration should create a lot of opportunities for investors and also for the younger population,” he said, once the border between Hong Kong and China reopened.
The panel was asked where, if they were investing their own money in Chinese real estate today, they would choose to invest and whether the logistics sector was still preferred by international investors. Gaw said that his firm had a lot of exposure to logistics, but competition was intense and that the also-favored data center sector was “facing a lot of headwinds.”
He suggested that real estate lending offered equity returns for investors with the nerves to act as a rescue lender for the residential sector, but there was “no easy answer” for the question of where to invest.
Tang agreed that credit offered an opportunity and also said that LaSalle liked multifamily, which was less competitive than logistics and had policy support. Also, “the demand fundamentals are extremely strong,” she said.
