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High interest rates stall foreign property deals in Hong Kong

Bank mortgage rates for commercial properties in the city can be as high as 6%. 

Recovery for Hong Kong’s non-residential investment market did not happen as predicted as interest rate hikes outweighed the boost from its border reopening.

According to Rosana Tang, executive director and head of research at Cushman and Wakefield, bank mortgage rates in the city which have gone up as high as 6% have deterred foreign investors from entering Hong Kong’s real estate market.

“The rising bank mortgage rate for commercial properties, and hence the financing costs, coupled with limited options for high-yield assets in the market, have brought buyers and sellers to an impasse,” Tang told Hong Kong Business.

Martin Wong, director and head of Research & Consultancy for Greater China at Knight Frank, shared a similar sentiment, adding that the average monthly instalment for small to medium-sized unit borrowing of around HK$5m (US$637,500) has increased by almost HK$4,000 (US$410) per month already.

“If the interest rate continues to go up, it will really erode the market purchasing power further,” said Wong. “Almost about 5% to 6% of the market purchasing power has gone because of the interest rate hike. If we are seeing that continue, it will erode even further the purchasing power market, and probably drive down the sales again.”

Apart from commercial properties, Wong said residential properties in the city are also not a good option for foreign investors under the current market, citing the city’s additional stamp duty.
 
“Foreigners still have to pay an additional stamp duty of 30% of the transaction value. I don’t think foreigners would like to touch on the residential properties because of that stamp duty,” Wong said.

Opportune time for local investors

Whilst current market conditions do not favour foreigners, Tang said now is an “opportune time” for local investors and end-users, adding that property prices have corrected notably since the pandemic.

Wong agrees with this insight, believing that local cash rich investors should still invest on residential properties in the city because the market and prices are “relatively weak.”

Based on data, local investors have indeed been taking advantage of the current market conditions in Hong Kong, becoming the most active buyers in 1H23.

Tang said local capital accounted for almost half of the total transactions in the city.

“We are now also observing greater activity from mainland investors and state-owned enterprises when compared with the prior three years of the pandemic,” Tang said.

Institutional investors, on the other hand, remained cautious amidst the  high interest rate environment.

Data from Knight Frank showed that the total large-sized (HK$100m) non-residential transaction volume dropped 20.2% QoQ and 61.8% YoY in Q2 to HK$8.3b (US$1.06b). The 2Q record brought the 1H23 volume to HK$18.7b (US$2.38b).

Top-performing sectors

In terms of sectors, Tang said private land sites, office assets, and retail properties performed the best in 1H23, accounting for 30%, 21%, and 21% of the transaction volume for the period, respectively.

Strata-title offices, high-street shops, and retail podiums were particularly popular amongst investors. 

The city’s  industrial sector has likewise been relatively resilient over the last two years, receiving active transactions.

“Investors are still keen to explore opportunities in this sector. However, the more aggressive asking prices from landlords have led to a slowdown in industrial transactions this year,” Tang said.

The hospitality sector has also seen some increase in deals, particularly hotels — thanks to the recovery in tourist arrivals and accommodation needs since the border reopening.

Transactions in the residential sector, on the other hand, have been declining.

“The subsequent interest rate hikes in May, coupled with global stock market volatility, have dampened potential buyers’ appetites towards the later-half of Q2 and recent two  months (June and July),” Tang said.

Will stamp duty help?

To help the residential sector, the government eased residential mortgage rules in July. Experts, however, said the easing will only help selected homebuyers.

“I perceive this policy as being more favourable towards supporting or facilitating first-home buyers or individuals seeking to upgrade their flats, rather than significantly boosting the residential transactions and prices in the market,” Tang said.

Frederick Lai, senior director of Capital Markets at CBRE Hong Kong, had the same sentiment, saying that easing of the mortgage restrictions will help homeowners upgrade to larger flats.

“Ultimately, because of the high interest rates and the high cost of financing, it’s making deals very hard to transact and pencil at the moment. So until that changes, I don’t think the other policy will really have too much of an effect on the investment market in Hong Kong,” Lai said.

Tang said that whilst the market believes interest rate hikes will peak in the second half of the year, many also believe that a high interest rate environment will still persist for quite some time.

Selecting the right location

For investors, whether local or foreign, who remain keen on investing on commercial properties in Hong Kong, Bevis Lo, director of Advisory & Transaction Services – Office Services at CBRE Hong Kong, suggested some locations to consider.

Since Hong Kong is traditionally an Asia-Pacific financial hub, Lo said business in the banking, finance, and private equity sphere should build their presence in Central and Admiralty.

For firms that belong to the Fast-Moving Consumer Goods (FMCG) segment, telecommunication, pharmaceutical businesses or trading businesses, going further east of Hong Kong Island would be good.

Particular locations in the east of Hong Kong which Lo recommends include Wanchai, Causeway Bay, Hong Kong East. Tsim Sha Tsui or Kowloon East are also good locations, Lo said.

However, he underscored that firms should buy properties based on their needs.

“Hong Kong buildings, typically on average, they’re around 30 years old. So it really depends on respective businesses having the need for flight-to-quality,” Lo said.

“As you go further east, down towards Hong Kong east and Kowloon East, that’s where building median ages go down drastically to 10 to sort of 15 years as well. That's where I see the emerging markets would be. We're seeing more and more occupiers wanting to satisfy flight-to-quality moving into those sub-markets,” he added.

Whilst high interest rates have stalled many property transactions in Hong Kong, Lo believes that the city remains to have a “very competitive edge over other Asian cities.”

“Geographically, we’re in a very, very good position. We’re connected to China. Also, flight time and travel time to other Asia Pacific cities is very, very close,” Los said.

“I feel like, for Hong Kong, as long as landlords are aligned with occupier needs, whether it’s satisfying ESG criteria, or facilitating them in terms of initial investments, or even the likes of building enhancements… I believe Hong Kong still has its competitive edge over other Asian cities,” he concluded.
 
READ PART I HERE: Diversification to shape real estate investments in 2024

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