Investors treading on thin ice amidst Occupy Central recovery

What is the ‘new normal’ going forward?.

Roughly two weeks have passed since the Occupy Central protest began on September 28. 2014, and it has been observed that based on the Hang Seng Property Index’s initial 3.8% correction during the week of September 28 and last week’s 1.5% rebound, investors are starting to move beyond the initial uncertainties and business disruptions.

According to a research note from Barclays, as businesses and life starts to return to normal, it believes the next questions that investors need to assess are “What is the ‘new normal’ going forward?” and “Will Hong Kong’s economic growth return to pre-protest levels?”

While Barclays said that it does not yet know how growth may be affected going forward, its report highlighted the historical relationship between economic growth and rental growth. Investors should then be able to plug in their own assumptions and draw their own conclusions, the report said.

Among the three property asset classes, office rents have traditionally shown the highest correlation with real GDP growth while retail rental growth has been tied to nominal GDP growth.

Here’s more from Barclays:

Since 1995, Central and overall office rents have shown 0.85 and 0.81 correlations, respectively, with real GDP growth. Our regression analysis suggests that when real GDP growth has been above 3.0%, overall office rents have tended to rise, and when it has been below 3.0%, office rents have tended to fall.

In terms of sensitivity, for every 100bp change in real GDP growth, Central rents have tended to change by 8.6ppt while overall office rents have been impacted by 3.68ppt.

For the retail market, its rental rates appear to have been more tied to nominal GDP growth with a correlation of 0.76. For the office market, it has been less sensitive to changes in GDP growth with an almost 1-for-1 sensitivity to nominal GDP growth.

Even before the Occupy Central protest, the Government Economist had lowered its GDP growth forecast for 2014. Back in August 2014, the Government Economist lowered 2014

GDP growth from 3.0-4.0% to 2.0-3.0%, and just last week, the Hong Kong University cut its estimate for 2014 GDP growth from 3.4% to 2.2%.

Although the initial assessment may be on how the past two week’s disruption may potentially affect 4Q14 GDP growth, beyond the near term, there are still lingering questions on how quickly the economic growth can return to normal.