Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm your host, Harold van der Linde, Chief Asia Equity Strategist at HSBC.
Speaker: We've been talking about mainland China's troubled property sector for a while.
Speaker: Now it's time to take the pulse of the real estate market here in Hong Kong.
Speaker: Spoiler alert, it's not exactly a pretty picture.
Speaker: Prices are falling, demand is weak.
Speaker: My usual co-host Fred is out of town this week, and I'm delighted to be joined by Michel Kwok, head of Asia real estate research and property analyst Raymond Liu.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: Let's set the scene with some customary facts and figures.
Speaker: For years, even decades, we've gotten used to the Hong Kong property prices basically going up and up and up.
Speaker: But that trend appears to be running out of steam.
Speaker: The year actually started on a positive note, with property prices up 8% on average in the first quarter, but then they've tailed off, and since then they're only up 1.3% year to date.
Speaker: Our property team expect prices in Hong Kong to keep falling before leveling out sometime in 2024.
Speaker: Is that part of a domino effect from mainland China or are there different dynamics at play?
Speaker: Michel, let's start with you.
Speaker: From a bias point of view, what are the differences between mainland Chinese property markets and the one that we have here in Hong Kong?
Speaker: Thanks, Harold.
Speaker: A very interesting question indeed.
Speaker: And there is actually a marked difference between how mainland Chinese homebuyers were to think about property relative to a Hong Kong homebuyer.
Speaker: The key difference here is really in the psychology.
Speaker: In mainland China, people tend to buy when prices are on the rise.
Speaker: In Hong Kong, there is now a view and it's saying that home price will re-establish an equilibrium.
Speaker: And so when home price actually come down, it may well offer an opportunity for prospective home buyers to re-enter the market.
Speaker: So key differences from a psychological perspective.
Speaker: So in terms of re-establishing a new equilibrium price in Hong Kong, home prices have softened.
Speaker: That's a very clear trend.
Speaker: Our view here is that home prices need to further soften in order for us to see that new equilibrium price point.
Speaker: Okay, so in Hong Kong, people buy on the dip, you could say, and in mainland China, people are waiting for prices to rise to really get in.
Speaker: That's the difference in psychology.
Speaker: That's right.
Speaker: In terms of policies, there must be differences between mainland China and Hong Kong as well, right?
Speaker: I would surely say in mainland China, the way the government has implemented policies have been quite harsh, I would say, in terms of restricting or easing.
Speaker: When a government wants to ease real estate measures, they will try different ways.
Speaker: In the latest round of easing, we have seen down payment ratio being cut, we have seen mortgage rate also being cut.
Speaker: In Hong Kong, I do think the way policies are being handled is a lot more subtle than how mainland China has handled it.
Speaker: Michel, over the last couple of years, we've seen people leaving Hong Kong, right?
Speaker: But I believe the government is now putting initiatives in place in order to attract talent back.
Speaker: Is that correct?
Speaker: And how would that impact the property market?
Speaker: That's right, Harold.
Speaker: In the end of 2022, the Hong Kong government put together a top talent pass scheme.
Speaker: And the intention here is to attract top talent back into Hong Kong, people within a certain income bracket and also educational background.
Speaker: And out of the 100,000 applicants that we've seen, 26,000 has already been approved.
Speaker: And if we were to look at the overall population number, we have actually already seen some very interesting development.
Speaker: In 2022 alone, population actually grew 2.1%, back to 7.49 million.
Speaker: So that should be good for demand for property in a sense, right?
Speaker: That should help property, particularly we feel for the rental market, where for top towns to be returning to Hong Kong or coming into Hong Kong for the first time, they would naturally look for a flat rent.
Speaker: Well, let's go to Raymond then here.
Speaker: Raymond, you are our HSBC property guru when it comes to Hong Kong property here.
Speaker: Let's focus on the residential market.
Speaker: So Michelle was suggesting there's actually people coming back.
Speaker: Does that mean that residential prices have bottomed out and are moving higher?
Speaker: Or has that time not come yet?
Speaker: What is happening in that market?
Speaker: Thanks for the question, Harold.
Speaker: So the housing market, I would say that is quite challenging here.
Speaker: Prices are falling and demand is weak.
Speaker: A recent mortgage rate high by banks and a weak economic recovery actually would further damage the already fragile market sentiment.
Speaker: So what happens now is actually home buyers are very prudent.
Speaker: Actually, they want to look for when the market is stabilized.
Speaker: So for developers, if they want to sell units, they need to cut price to boost their sales volumes.
Speaker: But what happens is profitability for the developers will erode for sure.
Speaker: So mortgage prices are, mortgage rates are very important.
Speaker: And Michel, you highlighted there's a couple of key differences here.
Speaker: You said the biopsychology between mainland China and Hong Kong is different.
Speaker: The policies are different, but mortgage rates presumably as well.
Speaker: Yeah, so you brought up a very important point here, Harold.
Speaker: And also, I here wanted to highlight the key difference between mainland China and Hong Kong, because both markets actually contrast each other.
Speaker: In mainland China, we are now looking at a situation whereby interest rate will be lower for longer.
Speaker: Mm-hmm.
Speaker: In Hong Kong, it's really the other way around.
Speaker: And we're looking at quite a reverse relationship where initially mainland China interest rate has historically been quite high relative to Hong Kong.
Speaker: So when we look at actually the interest rate backdrop, that is impacting the funding cost of purchasing a home in Hong Kong.
Speaker: But in mainland China, what's also very interesting is because of the intensity of policy measures, we generally feel that the fact that interest rate is now higher
Speaker: the impact of how home buyers think about financing their home purchase has been much less significant than the developed market like Hong Kong.
Speaker: Thanks, Michelle.
Speaker: In a moment, we're going to bring in Raymond to shed some light on the commercial side of Hong Kong real estate.
Speaker: So Raymond, you said there's a bit of weakness to come in the residential market before that finds a new equilibrium.
Speaker: And as Michelle has indicated, maybe that would allow buyers to come in and stabilize that market again.
Speaker: The outlook for the retail market must be very different.
Speaker: Retailers that rent property in order to sell their products, because that depends to a large extent on tourist arrivals and these sort of things.
Speaker: What is happening on that particular front?
Speaker: You're right.
Speaker: The outlook of retail market is relatively better because there are more higher chance for shopping mall operators to increase the rent in the coming years.
Speaker: In short, it's on a clear recovery track.
Speaker: If you look at the retail sales in terms of year-to-day performance, it has gone up by over 20%.
Speaker: Very strong.
Speaker: Yes, very strong.
Speaker: Compared to last year, which is fletish.
Speaker: So the major reason is the return of the mainland Chinese tourists.
Speaker: Early this year, the border between mainland China and Hong Kong reopened.
Speaker: That's why there's a lot of mainland Chinese coming here to spend.
Speaker: But that's been quite weak, right?
Speaker: The number of mainland Chinese that have come back into Hong Kong.
Speaker: The pace has been slow.
Speaker: But if you look at the August figure alone, actually it's quite encouraging.
Speaker: August visitor arrivals exceed 4 million people.
Speaker: Which means it's actually recovered over 70% compared to the pre-COVID level.
Speaker: But the key thing is, if you look at the spending patterns, there's a big challenge here.
Speaker: A lot of mainland Chinese actually spending less and their spending behavior also is different compared to the past few years.
Speaker: And at the same time, if you look at the retail market, a lot of Hong Kong people increasingly visiting the Shenzhen shopping malls during the weekends.
Speaker: Shenzhen being just across the border in mainland China, right?
Speaker: Exactly.
Speaker: So people, because when they see the Hong Kong dollar actually appreciate against the RMB, they want to shop more in mainland China.
Speaker: Yeah, no, I think you're right.
Speaker: There's a lot of people even in our own department, Raymond, that I know that go watch a movie in Shenzhen, right?
Speaker: You hop across the border, it takes about 45 minutes, you have a dinner there, you watch a movie, and you come back.
Speaker: And the cost of travel offsets the much lower prices that you can get there versus Hong Kong.
Speaker: So you're still having a...
Speaker: a cheaper night out and it's quite a nice thing to do to go there and soak up the atmosphere in Shenzhen, right?
Speaker: Exactly.
Speaker: The other big segment is of course the commercial segment, the companies that rent a space in order to do their businesses.
Speaker: How is that going given the weak backdrop of growth across the whole of Asia but in particular mainland China?
Speaker: Sure.
Speaker: I would say that the office market in Hong Kong is very challenging.
Speaker: The latest spot rent actually is over 30% below the pre-COVID level.
Speaker: One of the major issues is about oversupply.
Speaker: So we can actually see that there are a lot of vacant space across all of the sectors.
Speaker: Is it also because people are working from home these days?
Speaker: Yes, it's one of the phenomenons.
Speaker: At the same time, demand is the big issue.
Speaker: So the major demand in Hong Kong comes from multinational corporate as well as financial institutions.
Speaker: But now we can see that most of them actually downsizing.
Speaker: So all this actually drag in terms of recovery for the Hong Kong office market.
Speaker: So just to recap things a little bit here, Michelle has just highlighted that there are substantial differences between the Hong Kong property market and the mainland Chinese one in terms of buy-up psychology, but also the policies that are being put in place, but also actually that the interest rates in Hong Kong are rising while in China they're coming down.
Speaker: So those dynamics differ as well.
Speaker: And what we're now seeing is that the general trend, particularly in the residential market, is still weaker, but it seems it's trying to find some kind of footing, if you want to put it like that.
Speaker: Maybe prices trend a little bit lower, but as Michel has suggested, buys will come in.
Speaker: On the retail side, actually things are doing okay-ish.
Speaker: It's just that after COVID, things have played out very different.
Speaker: The buyers tend to be very different.
Speaker: And also we see Hong Kong people going now and shopping in Shenzhen much more so than before COVID.
Speaker: But in the commercial segment, it's still, yeah, that's where businesses rent places and people work from home.
Speaker: So that's where most of the weakness is.
Speaker: Is that a fair kind of overview?
Speaker: Definitely Harold, I think you summarized it very well.
Speaker: Very different dynamics in two markets, but at the same time we think in mainland China, things are, I would say, improving.
Speaker: There are anecdotal evidence after the latest round of policies that the weekly sales numbers now look to be on an improvement trend.
Speaker: In Hong Kong, however, we continue to hear news about developers' price cut initiatives.
Speaker: The both markets have gone through a very similar transition period, but at a different rate.
Speaker: Mainland China, we have been in such transition period for three years now.
Speaker: For Hong Kong, I would say we've started much later.
Speaker: So it would really be quite interesting to see how the remaining months of the year play out from here.
Speaker: It certainly will be.
Speaker: And on that note, big thanks to both of you, Michelle and Raymond, for joining me here on the podcast.
Speaker: Thanks for having us.
Speaker: Thank you.
Speaker: That's a wrap for this week, folks.
Speaker: Remember to check out the other podcasts from HFBC Global Research, the Macro Brief, for the big picture on global economics, and the ESG Brief for all things environmental, social, and governance related.
Speaker: Thanks again for joining us under the banyan tree.
Speaker: We'll be back at the same time next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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