Hong Kong Property Investors Sit Tight For Now Amid Violence On The Streets
For more than two months now, images have been beamed around the world daily of mass protests on the streets of Hong Kong, and clashes between protestors and riot police that have seen tear gas fired and cars driven into barricades.
There is a truism in the real estate world that money flees from areas of political volatility: When investors are worried their money is not secure in their home market, they look to park it in safe havens around the world, and real estate in gateway cities is seen as a good safe deposit box. With that in mind, will capital start to flow from Hong Kong into big cities like New York, London and San Francisco?
The protests are railing against new laws that would allow the extradition of individuals to China to face trial in courts convened by the authoritarian government. That is a big change for the citizens of an island that was a British colony until it was handed back to China in 1997, and which has an uneasy relationship with the communist superpower. When China took control of Hong Kong it said it would be allowed its own rules on all matters apart from foreign affairs and defence.
The densely populated island has long been a real estate juggernaut. It has one of the largest REIT markets in the world. The largest single building ever sold is an office tower in the central business district, a stake in which traded at price which gave the whole building a valuation of $5.2B in 2017. And its investors have been among the most active Asian buyers globally, with both wealthy individuals, companies and institutions undertaking 10-figure deals in markets around the world.
The view from on the ground is that investors are unlikely to take flight immediately. Hong Kong investors, like many sophisticated investors in Asia, have been looking to diversify globally for some time now.
“Those who have the ability to invest on a global basis have already done so,” Bei Capital founder Collin Lau said. “Diversification is something that is always ongoing, no matter what is happening politically.”
That said, Lau, previously head of real estate at China Investment Corp., the country’s sovereign wealth fund, pointed out that the longer the volatility continues, the worse it is for the domestic market, and the more likely people are to look abroad.
“If this drags on for a while, it will be negative for retail, for high-end offices and high-end residential. What we need is some sort of realistic compromise — if it is protracted it hurts sentiment.”
Outbound investment has increased in 2019 compared to the previous year. So far Hong Kong investors have spent a net $5.3B outside their home market this year, compared to $4.9B in the whole of 2018, according to Real Capital Analytics. But this isn’t particularly high on a historic basis: At the peak in 2017, Hong Kong investors spent a net $11.9B overseas.
As big a factor as political volatility is the conditions in the domestic Hong Kong market. Petra Blazkova, RCA senior director of Asia Pacific analytics, noted the uptick in outbound capital from Hong Kong, but said it had as much to do with the fact that prime office yields on the island are around 2%, lower than almost anywhere else on earth. Almost any city looks good in comparison.
She said the unique politics of Hong Kong could work toward stemming money fleeing from the island. China has put a bar on all overseas real estate purchases by its investors. The same rules don’t apply to Hong Kong companies, but those with strong links to the mainland were disincentivized from investing abroad.
“Maybe there would be a desire for investors in theory to take money out,” she said. “But it is not a truly open market and it is a complicated political system. People don’t want to upset Beijing.”
That theory is borne out by the data about where Hong Kong investors are heading when they invest abroad: Of the gross $10.7B of overseas assets that have been acquired by Hong Kong firms this year, $3.7B of that has been in China.
There are also signs that the two main magnets for overseas investors, London and the U.S., are becoming less popular with Hong Kong investors. So far this year more Hong Kong capital has been invested in Singapore and Japan than in the U.S. and UK, RCA data show. Investment in Australia has also increased this year.
This is because while Hong Kong is experiencing big upheavals now, the UK and U.S. do not lack for uncertainty either.
“The U.S. is not really a preferred destination in the foreseeable future,” Lau said. “People are not happy with the policy volatility over recent times. The government debt and its level of interest payment every year is not sustainable.
“London may benefit because investors have a network there and a history with London. But for the last two years people have been very concerned about the protracted dragging on of Brexit negotiations and the possibility of a so-called hard Brexit. People are cautious: They see what the new PM is doing and don’t know if that is what he believes or if it is a tactical game. If there is a resolution that will help Hong Kong and Asian interest.”
Blazkova also pointed out that the recent escalation of the trade war between the U.S. and China had cooled investor interest in the U.S.
“I was there two years ago, and one of the first remarks when you spoke to any investor from China or Hong Kong was massive concerns related to Donald Trump,” she said. “They are not investing in the U.S. at the moment because from a political perspective they are concerned their investment won’t be safe.”
That is not to say there will be no investment from Hong Kong into the U.S. and London. Just this week Hong Kong-based Gaw Capital agreed to buy the 463K SF Hollywood & Highland mixed-use scheme in Hollywood.
And those active in bringing cross-border investment to London said they are starting to see an increase in interest from Hong Kong after what has been a period of inactivity when compared to recent years.
“We track the investors that have already invested in the UK but also those visiting the UK to look at potential new investments and there has been a noticeable increase,” CBRE Head of International Capital Markets Chris Brett said. “Partly it is the summer and partly it is the fact that the depreciation of Sterling makes the UK so cheap, but there are more Hong Kong investors in town, and a lot more coming over to spend time looking at the market. Because of the current uncertainty there we will see more.”
Brett said that, in spite of Brexit, London is a city that holds unique appeal for investors from Hong Kong.
“There is a long shared history, and the political and legal system of the country is built upon the UK system,” he said. “If you look around the major cities of Europe and the world, you can’t pick out many assets owned by Hong Kong investors.”
But in London, Hong Kong-based investors spent more than £3.5B on just three buildings in the past three years: the Cheesegrater, the Walkie Talkie and UBS’ 5 Broadgate HQ. A prime West End office at 21 St James’s Square is expected to sell to a Hong Kong buyer imminently, and this year private investors from the island have been big investors in luxury London retail assets.
Real estate is an illiquid, slow-moving asset class, and even in times of flux and uncertainty, the flow of money into the sector in major global gateway cities is not going to be instantaneous. But the protests in Hong Kong do put into perspective the fact that, while things may seem tumultuous in the UK or U.S., there is always somewhere with volatility that is even more acute.