FLHK - Hong Kong Property: Challenged But Resilient

2023-09-13 01:00:00 ET

Summary

• The Hong Kong property market, known for its high prices, is navigating challenges due to factors like rising rates, slow post-COVID recovery and close ties to mainland China.
• The office sector in Hong Kong, with high vacancy rates, could take years to clear.
• The residential property sector in Hong Kong exhibits several mitigating factors.

By Gloria Lam

The city’s property market has marked advantages over that of mainland China.

The Hong Kong property market, known for its high prices, is navigating challenges due to factors like rising rates, slow post-COVID recovery and close ties to mainland China.

The office sector in Hong Kong, with high vacancy rates, could take years to clear. Hong Kong's interest rates, linked to the U.S. through the currency peg, are pressuring the liquidity of several highly leveraged developers, raising concerns about a potential repeat of the turmoil in Chinese property credit.

However, the residential property sector in Hong Kong exhibits several mitigating factors. The property price index in Hong Kong only increased marginally during the pandemic, unlike the significant rise seen in many other metropolitan areas.

Current data indicates a stabilization of population flow and structural demand from household formation, which has contributed to a relatively balanced supply-demand equation ¹ .

In addition, two-thirds of private residential housing stock in Hong Kong is mortgage-free ² with system-wide residential mortgage nonperforming loans of 0.07% and an average loan-to-value ratio of 53% for new loans granted ³ , reducing the likelihood of a large-scale forced sales scenario.

The government also retains the option to reverse cooling measures implemented in the past to smooth out the downcycle.

Unlike mainland China's residential market, which is reversing the high-leverage and high-growth model seen over the past decade and faces issues in many lower-tier cities, Hong Kong is a single, developed city with a highly mature property market.

Recent primary discounts leading to sales serve as an example of the market's ability to find a clearing level, a dynamic not often seen in the mainland. These factors collectively differentiate Hong Kong's residential property market correction from the difficulties faced by mainland China.

Most Hong Kong developers have firmly maintained their investment-grade status through cycles, with highly leveraged developers being a minority. This contrasts with the mainland, where high-yield developers have had a larger market share.

Another difference is the legal jurisdiction and structure of bonds issued by Hong Kong developers, which carry much better recovery assumptions than offshore bonds issued by developers from mainland China, which are subordinated to most onshore claims.

In conclusion, the Hong Kong property market undoubtedly faces challenges. However, its unique dynamics should aid it in navigating these challenges differently from mainland China's real estate market. For investors, understanding these intricacies is crucial to making informed decisions in the current economic environment.

Source: (1) HK Govt Housing Bureau, Long Term Housing Strategy, as of October 2022; (2) HK Government Census and Statistics Department, 2021 Census report; (3) HKMA, data as of July 2023

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.

Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

© 2009-2023 Neuberger Berman Group LLC. All rights reserved.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

For further details see: