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How Can Hong Kong Weather the Storm of Plunging Property Prices?

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Pacific Money | Economy | East Asia

How Can Hong Kong Weather the Storm of Plunging Property Prices?

Between COVID-19 and the new national security law, foreign investors may be losing their taste for the Hong Kong market.

How Can Hong Kong Weather the Storm of Plunging Property Prices?
Credit: Unsplash

In 2020, Hong Kong topped the global rankings of the world’s most expensive property markets, despite the predicaments of the COVID-19 pandemic and sociopolitical unrest, according to StockApps. A residential property in the city, for example, costs a staggering $1.23 million on average. Influenced by the public health and sociopolitical crises, housing foreclosures in Hong Kong rose by 54 percent in the first seven months of 2020 to 675, as reported by property auctioneer Century 21 Surveyors. Hong Kong’s commercial property market, alternatively, has seen a 30 percent drop in building values in the past 12 months.

The enactment of the China’s National Security Law, which came into effect on June 30, has enabled government authorities to freeze assets and seize properties within the Asian financial hub. The law has sparked concerns that foreign citizens will view the city as a less desirable place to work and live.

“The most important thing for Hong Kong is its stability and continued success… One of the reasons [Hong Kong has] always been successful is the high level of transparency, the excellent legal system and the rule of law,” said Nick Loup, London-based group vice chairman at Chelsfield Group. However, the arrest of members of Hong Kong’s democratic camp, led by media tycoon Jimmy Lai, along with Chinese authorities’ arrest and detainment in mainland China of Simon Cheng, who formerly worked in the U.K.’s Hong Kong consulate, have all raised concerns that transparent and reliable law enforcement might be a thing of the past.

The recent Reimagining Asia Pacific Investment Strategies report indicated that Hong Kong is the most feared real estate market in Asia Pacific, with as much as 18 percent of representatives from 38 investment firms deciding to decrease their exposure to the city.

“I recently spoke to two foreign funds who said they would not consider Hong Kong at this time because the political risks are relatively high now,” said Daniel Wong, CEO of Midland IC&I.

Hong Kong seems on a trajectory toward mainlandization and a more closed approach to the outside world, at least for the time being. The city is increasingly viewed as a typical Chinese city, despite its Special Administration Region (SAR) status. Even before Hong Kong began weathering the current storm of public health and political uncertainty, foreign real estate investors were already losing their confidence in the long term prospects of the Asian financial hub. 

In order to regain commercial real estate values, Hong Kong could welcome more mainland Chinese investors to purchase commercial properties within the city. Since a recent 30 percent plunge in the commercial real estate market, mainland Chinese investors began targeting these commercial establishments, signaling a new wave of demand. As China recovers slowly from the COVID-19 pandemic and mainland Chinese investors are ready to deploy their liquidity, Hong Kong may rely more heavily on the influx of Chinese capital to strengthen the city’s status as one of the most expensive commercial property markets worldwide.

“If Hong Kong gets more stable in the next few months after [the] national security law, we expect more mainland companies to open branches here, and that will help the office sector to recover,” said Dennis Cheng, senior sales director at Ricacorp (C.I.R.) Properties.

For the residential property market, alternatively, the continual decrease in property prices has demonstrated that it is perhaps the right time for Hong Kong citizens to purchase their own accommodations. The financial inability of Hong Kong citizens to buy their own residential units is well-known as one of the major drivers in the recent growth of anti-government resentment. The Hong Kong government could tighten its quotas on how many local residential properties non-Hong Kong citizens can purchase in order to avoid those who are not local taking advantage of the current crises and coming to dominate residential property transactions for investment rather than residential purposes. The suggested implementation of tightened quotas could prioritize Hong Kong citizens, allowing them to enjoy the benefits of the unusually affordable residential prices. By raising the housing affordability for local citizens, anti-government resentment within the city may be reduced, facilitating stability.

Jason Hung is a Ph.D. in sociology candidate at the University of Cambridge and the author of “Social Barriers to, and Gender Gaps in, Educational Attainment Faced by Rural Citizens in China.”