- Analysts are beginning to see an upside for Britain’s property sector despite three years of Brexit chaos
- But with violence ongoing and the local government paralysed, such optimism is lacking for Hong Kong’s market
Property agents are famously bullish, so it was only a matter of time before one of the big advisory firms put out a note arguing that Britain's impending departure from the European Union may be a blessing in disguise for the country's real estate market.
In a report published on September 2, leading property consultancy CBRE noted that while rental yields for prime offices in the euro zone kept falling following Britain's decision in 2016 to vote to leave the EU, their British equivalents remained stable. This has left prime offices in Britain "trading at substantial discounts or offering favourable yields compared to similar assets elsewhere. This positions UK property well for a rebound in activity once the Brexit dust settles…"
While CBRE is clearly underestimating the scale of the economic damage that a "no-deal Brexit" " an outcome that is looking increasingly likely " would wreak, higher yields, coupled with the plunge in the British pound since the referendum, have admittedly made commercial property in London more attractive to many overseas investors.
As Hong Kong enters its fourth month of mass protests, are there any silver linings for the city's property market?
In Central district, far and away the world's priciest office market, the triple whammy of China's slowdown, the intensification of the trade war and the severe deterioration of Hong Kong's economy since the protests began has at least put a lid on the seemingly inexorable rise in occupancy costs.
Rents in the Central, Admiralty and Sheung Wan districts fell 0.5 per cent quarter on quarter in the second quarter of this year, marking the first decline since the third quarter of 2014, data from CBRE shows.
The mounting strain on Hong Kong's economy, moreover, is forcing more and more companies to lease space outside the city's core office districts, where rents are as much as 75 per cent cheaper, adding impetus to the decentralisation trend that has become a crucial safety valve for the city's cost-conscious occupiers.
Why Hong Kong homes and offices will stay costly for now
Still, prime office yields in Hong Kong " which, at just above 2 per cent, are among the lowest globally " are holding steady, underpinned by ample liquidity and resilient capital values. In a report published last month, JLL, another property adviser, noted that "pricing remained relatively unchanged as vendors continued to hold firm on asking prices".
There is greater scope for a meaningful correction in the residential sector, particularly since the world's least-affordable housing market has contributed to tensions in the city, and indeed is seen by Beijing " which has long been concerned about the risks posed by unaffordable housing in China's first-tier cities " as the underlying cause of the turmoil.
Since the end of June, second-hand home values in Hong Kong have dropped nearly 4 per cent, according to Centaline Property Agency data. Prices could decline more sharply if the government takes a harder line with property magnates by pushing through a new tax on vacant flats and forcing developers to release more land for public housing, further exacerbating the acute undersupply of private homes which continues to prop up prices.
Yet, the fact remains that the urgent need for cheaper housing, while providing Beijing with an opportunity to exploit deep-seated social problems in Hong Kong, is not among the protesters' demands. More importantly, given the severity of the erosion of Chief Executive Carrie Lam Cheng Yuet-ngor's authority since the unrest began, it is difficult to see how her government could credibly implement any major reforms right now.
Why Beijing needs Carrie Lam to hang on and prove herself in adversity
However, the one redeeming feature of the protests is that they have drawn attention to Hong Kong's unique role in China's economy and capital markets. Since the crisis erupted, the political and regulatory underpinnings of Asia's premier financial centre have become ever more apparent, making military intervention extremely unlikely.
Fitch Ratings and Moody's actually did Hong Kong a service by downgrading it this month. The negative rating actions not only crystallised what is at stake for the city's governance and creditworthiness as the crisis drags on, they also highlighted why Hong Kong has an edge over other large cities in China.
However, it is the shocking scenes of violence and vandalism that are uppermost in investors' minds right now. British commercial property transaction volumes may have fallen to their lowest levels since 2012 this year, but at least tourists are not shunning London for fear of being caught up in the conflict.
The crisis in Hong Kong is of a different order of magnitude to the turmoil in Britain. As Bloomberg reported last week, citing a survey, almost 80 per cent of hotel staff in Hong Kong have been asked to take unpaid leave of up to three days while nearly half expect their monthly income to be reduced by up to HK$3,000. Retail sales in Britain are still rising year on year. In Hong Kong, they have fallen for six straight months.
If there are any silver linings for the city's real estate market, they are devilishly hard to spot.
Nicholas Spiro is a partner at Lauressa Advisory
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