Property valuation to take a hit if political situation worsens

There has been growing demand from Mainland occupiers in the city’s office sector.

If the political environment in Hong Kong worsens even after the COVID-19 pandemic eases, the property valuations across all sectors could be affected by a medium term exposure to capital outflows, according to a report from UBS-AM.

Economic linkages with mainland China is expected to be the most important catalyst for ongoing prosperity in Hong Kong, but investors have been increasingly concerned over heightened political risks from rising social tensions.

“It is apparent that politics will affect the real estate market in Hong Kong more than anything else,” the report stated. Stability is expected to make or break the city’s real estate markets in the next five years.

Hong Kong saw the biggest absolute and YoY decline in investment volumes in 2019, with commercial investment volumes crashing 45% to US$13.8b in 2019. Q4 2019 also marked the lowest quarterly investment volumes since 2009.

Further, the report warned about the possibility that the Chinese government will use the unrest, if unresolved, as a catalyst to ramp up the development of Shenzhen in the next five years, which could dilute Hong Kong's appeal to multinationals and Chinese firms.

The occupier profile of the city’s office sector has shifted from a clear dominance by multinational firms to a growing demand from Mainland occupiers especially from the finance sector, which has played a key role in pushing up prime office rents in Central.

However, enquiries from Chinese companies have largely evaporated, which could hit office absorption in Central.

In the retail sector, there was a plunge in retail sales in the latter half of 2019 due to a sharp drop in tourist numbers amidst unrest. Visitor arrivals in October 2019 plunged by more than 40% YoY.

China's "Golden Week" holiday in October did not boost tourism for Hong Kong either, as mainland Chinese tourists diverted their holidays elsewhere.

Still, major knee jerk reactions by owners in the form of distressed sales or a decompression of cap rates in the next three to five years are not expected to happen.

“Hong Kong's economic fundamentals remain sound on account of a well-regulated financial and banking sector, strong fiscal position and a tight labor market that will support wage gains. And these are unlikely to change drastically in the next five years,” the report noted.