HK property is facing significant challenges, in the new reality of being increasingly viewed as 'another Chinese' city. Will this mean prices will fall more than its brethren in the north (or rise less if market turns up) henceforth? We look into a number of factors that influence the outcome of this interesting investment dynamic, perhaps starting with the bad news first: 1) Chinese outbound tourists bypassing HK (bad)? As more relaxations are introduced/restored for visa free entry to global destinations (right column in table below), PRC tourists may bypass HK even more and head for exotic climes directly:  This trend of disintermediation, is also manifesting with more overseas countries given visa exemptions for visiting China (left column above), a factor further compounded by increasing flights from gateway PRC airports to overseas cities, reducing the hub role HK has long come to enjoy. 2) Rising retail standard + cheap RMB => surging northbound HK shoppers (bad) As amply illustrated in article 1 below, increasingly sophisticated retail offerings in PRC cities, more spacious physical hardware, (sometimes) better services, and of course cheaper cost is now triggering a new phenomenon where HKers go spend weekends in SZ for leisure and even for grocery shopping. In office space alone, more companies may be tempted by the now Grade A spec but much more affordable occupation costs up north:
HK office costs are still 3x prime SZ equivalents, which coupled with cheaper labour, may entice increasing numbers of businesses to set up north of the border - especially if travelling on the High Speed Rail, one can be in Futian from Kowloon West in a matter of 14 minutes, on fares (book yours here) cheaper than the cost of a cup of Starbucks ... It is worth noting also that occupancy costs fell across the board in the China/HK markets in Q4 23, compared to mostly rises in other global cities - showing how weak the domestic economy was then, and why the Chinese govt had to pump prime to save the property sector in recent weeks. 3) PRC rate cuts vs Fed rate hikes (bad) We have long maintained that wars and deglobalisation will only worsen inflationary pressures, and that this would leave little to no scope for rate cuts by the Fed:
What's more, the still high real interest rates in China allows it ample further scope for credit easing - some 150bps vs US, and nearly 280bps vs UK):
The conclusion of this rate trend divergence is best illustrated in the chart below:  Whenever HK rates hike less than PRC rates (green arrows pointing up, eg 1992, 2006), HK prices tend to rise much faster (red arrows up). The reverse is the case when HK rates rises more above PRC rates - which is where we are now - prices underperform SZ (eg 1996, 2013 to date). With the rate picture increasingly looking like HK rates staying high while China cuts further in the coming year (rightmost green arrow above), HK residential premium over SZ will likely shrink further in the coming two years. 4) Facilitating Southbound flows (good) The HK govt has been tapping into the rise in PRC wealth and talent by attracting them to settle in HK (article 2), but this is not radically different from some other immigration schemes already in place, and perhaps does not have as strong an impact as in earlier years. Similarly, attracting more southbound shoppers is nearing its potential (we already have 49 cities on easy travel arrangements, see article 4), and thus will unlikely result in any quantum leaps with further relaxations. 5) Higher SZ base good for higher HK too (good) As can be seen below, the premium in HK prices remain quite substantial over SZ for comparable luxury estates (Residence Bel Air in HK vs Seaworld Shuangxi Garden in SZ):  Whilst global comparison suggest that our current 120% premium may be too high - eg NYC Midtown is 50% premium over San Fran, and 63% premium over NYC Downtown - perhaps the shrinkage of the HK-SZ premium is largely done. Hopefully SZ price increases will do most of the catch up work rather than even deeper HK price drops... Looking forward, we think a combination of the two remains the most likely scenario; here the Price-to-income ratio trends suggest that SZ prices will improve by some 12% in the coming year or two whilst HK might see a larger 30% correction. For HK, the bulk of the improvement will have to come in price correction rather than income growth:  6) Yields already safer than many global cities (good) A saving grace for HK at least is that its real property yield is already quite 'reasonable' when viewed in the context of real property returns:  Above table is updated to December, showing that high inflationary pressures in places like Tokyo and London is destroying returns on rentals, whilst both SZ and HK sit reasonably happy in positive territory near the top of the pile. Generally high real return markets are more sustainable pricewise than -ve yielding ones. The higher nominal yield in HK (3%) also means that the higher interest rates here in the longer term will make for a healthier market when SZ's paltry 1.4%:
7) final technical look - SZ might do better medium term? On a long term technical perspective, SZ could continue to play catch up, but we await price action to give the next signal (either pierces the green support or breaks out of the blue resistance) before jumping into investment action. The answer might show itself by as early as mid-2024:
Given various headwinds in primarily geopolitics, perhaps investors are best to diversify into commodities and low conflict risk jurisdictions, exactly what we have been doing for the past 2-3 years... ==================Article 1================== Hong Kong vs Shenzhen: a day of food, drinks, sightseeing and leisure compared – how much cheaper can the mainland Chinese city be?The recent jump in people heading from Hong Kong to Shenzhen at the weekend suggests you can enjoy a lot more for much less in the mainland Chinese city... ==================Article 2================== Facilitation measures on two-way flow of high-end talents within the GBAThe Hong Kong Special Administrative Region Government and Mainland authorities have been exploring means to further facilitate the two-way flow of talents within the GBA, including “northbound” flow of non-Chinese Hong Kong residents.... https://www.info.gov.hk/gia/ ==================Article 3================== China cuts 5-year mortgage rate by record margin to aid property sectorThe People's Bank of China lowered the five-year rate to 3.95%, from 4.2%, marking the first reduction since last June... ==================Article 4================== 消息指中央同意擴大自由行來港 有議員料納入更多二三線城市現僅49個城市居民可自由行來港 部份省份無份原文網址: https://www.hk01.com/article/ English Google translate here. |
2024年2月23日星期五
Will HK fall more than SZ? 20240222
2022年12月16日星期五
Dash to lift lockdowns... at last! 20221216
After vacillating and hiding for far too long behind the rest of the world, the tide of protests finally prompted Chinese authorities to swiftly take down most of its lockdown measures - almost like a domino fall, and it is still in motion by the day.
Good news at last for HK properties as the PRC money and talent starved SAR will finally be able to play its conduit role without which it can hardly be called an international 'anything' centre...
So briefly here are some of the big changes that have been implemented or hinted to be put into effect:
HK relaxations:
- LeaveHomeSafe (the identity tracing app) scrapped from 14th Dec - residual restrictions of vax status scan still required to enter dining venues (article 3);
- Quarantine-free travel between China and HK from early January - see article 2;
- We expect the embarrassing climb down by officials means the vax pass may also be abandoned in Jan, signalling a full return to normal after 3 years of prison like living.
China's “Ten New Measures”:
The measures (details in article 1) came down like a tone of bricks and swiftly swept through China like wild fire from 13 Dec onwards. The impact is jaw dropping in its magnitude and extensiveness, one day after the announcements:
- Search volume for air tickets increase by 438% ;
- Search volume for air tickets during Chinese New Year increase by more than 5 times;
- Search volume for train tickets increase by 276%;
- Search volume for train tickets during Chinese New Year increase by nearly 7 times;
- Search volume for hotels increase by 7 times
- vs a week before, scenic spot ticket sales rose by 59% to 300%
Back to HK, we expect the reopening to finally put a bottom beneath the rental levels of ALL property types, with prices benefitting as well. Take retail for example:
Assuming PRC visitor numbers return to pre-unrest/pre-lockdown days in the 2017-18 area (blue arrow), we could safely project F&B value to go up 24% from here (or combined 12% to mid-23 (lower red arrow) and then another 13% to end-24 (upper red arrow)), or if we ignore the events of the past four years and assume the pre crisis trend (red dotted line) will continue, an even larger 51% rise from here (red dotted arrow).
Extending the analysis to retail rents:
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It is not difficult to see retail rent will rise some 10% conservatively from here in the next year and half (red arrow), and if a return to trend unfolds, even 23% rise from here over the same period (dotted red arrow). All this is before we factor in the high inflation that is now the norm, which tends to push up rents even when the economy slows...
Now is a good time to lock in your rental agreements (if not already late), before aggressive hikes becomes a norm in the new year?
-----------------------------------------------------article 1------------------------------------------------------------
The “Ten New Measures” have just been released, and the search volume for air tickets has increased by 438% in an instant, and the search volume for hotels on New Year’s Day has increased by 7 times! Searches for air tickets soar to three-year high on the eve of Chinese New Year
December 07, 2022
On December 7, the National Joint Prevention and Control Mechanism issued the “Notice on Further Optimizing and Implementing Prevention and Control Measures for the New Coronary Pneumonia Epidemic”. The notice proposed a total of 10 specific items, including scientifically and accurately dividing risk areas, further optimizing nucleic acid testing, optimizing and adjusting isolation methods, etc....
Optimizing the implementation of the new ten rules for epidemic prevention and control is here! focus
- Temporary blockade in various forms shall not be adopted;
- No more inspections of nucleic acid test negative certificates and health codes for cross-regional migrants, and no landing inspections; except for nursing homes, welfare homes, medical institutions, childcare institutions, primary and secondary schools and other special places, no nucleic acid test negatives are required proof, without checking the health code;
- Asymptomatic infected persons and mild cases who are eligible for home isolation are generally home isolated;
- High-risk areas with no new infections for 5 consecutive days should be unblocked in time;
- The online and offline purchase of antipyretic, cough, antiviral, cold and other over-the-counter drugs shall not be restricted;
- Accelerate the vaccination of the elderly against the new crown virus;
- Promote the implementation of hierarchical and classified management;
- Non-high-risk areas shall not restrict the movement of people;
- It is strictly forbidden to block fire exits, unit doors, and community doors in various ways;
- Schools without the epidemic should carry out normal offline teaching activities.
above text from Google Translate, Chinese version:
-----------------------------------------------------article 2------------------------------------------------------------
Hong Kong to send ‘thousands of officers’ to checkpoints along mainland Chinese border ahead of shift towards freer travel
Cannix Yau and Clifford Lo | 16 Dec, 2022
...
[quoting key points of the article only]
Sources previously told the Post that the city was set to fully reopen its borders with the mainland and resume the high-speed train service to Guangdong from early next month.
The expected reopening follows the government’s decision to roll back anti-epidemic restrictions, such as easing entry rules for arrivals and no longer relying on the “Leave Home Safe” risk-exposure app, despite a significant increase recently in Hong Kong’s virus caseloads.
Thursday marked the highest number of daily cases since March 18, with health officials reporting 17,080 infections, 831 of which were imported, and 19 additional deaths.
The city’s overall tally stands at 2,307,397 cases and 11,075 related fatalities.
As part of eased restrictions on the mainland, authorities there have introduced measures to facilitate the cross-border flow of people and goods from Hong Kong, including increasing the daily quota for the number of residents allowed to cross from 2,000 to 2,500 on Thursday.
From Monday, mainland authorities have also allowed cross-border truck drivers to collect and deliver goods directly to destinations there without using the designated checkpoints.
...
A third government source said authorities would conduct refresher training for officers, inspect equipment and test computer systems, as well as carry out disinfection of facilities before reopening the checkpoints.
...
A source familiar with the plan to fully reopen the border said Beijing was keen to restore travel by earl He added that the reopening had been planned for a long time but was postponed several times as a result of different circumstances.
...
Hong Kong Railway Employees Union chairman Tam Kin-chiu said the move was subject to government approval but rail staff had already received rosters for both days.
-----------------------------------------------------article 3------------------------------------------------------------
Covid-19: Hong Kong axes app QR scanning to enter venues and lifts some restrictions on arrivals
by HILLARY LEUNG | 13-Dec-2022
While the use of the LeaveHomeSafe app for entering businesses has been scrapped, members of the public must still show their Vaccine Pass. Separately, arrivals will no longer be issued an amber code.
Hong Kong will no longer require members of the public to scan their Covid-19 LeaveHomeSafe app to access restaurants and other businesses starting from Wednesday, though vaccine proof will still be needed.
Arrivals will also not be issued an amber code in their LeaveHomeSafe app, meaning that people will be able to visit restaurants and other businesses during their first three days of landing in Hong Kong. Vaccine proof, several rounds of testing, and a health declaration will still be mandatory to enter the city.
Making the announcement at a press conference on Tuesday, Chief Executive John Lee said the adjustments were based on data and risk assessment.
“The risk of imported cases to Hong Kong is even lower than the risk of getting infected in the community,” Lee said. “Cancelling the amber code [arrangements] will not increase the risk of getting infected locally.”
He added that under the new rules, the LeaveHomeSafe app will only issue two different codes – red for those infected with Covid-19, and blue for those not infected.
The use of the Vaccine Pass, however, will still be required to enter businesses.
...
Residents are still required to wear face masks, including outdoors, and a gathering limit remains in force for groups larger than 12.
Arrivals to the city are also subject to two PCR tests and daily rapid tests for their first five days in the city.
He added that the resumption of “normal travel” with the mainland was “close to [his] heart.”
“I’ll do everything that can facilitate it, but we also must be aware that the decision must similarly be made on the actual situation… but I think that all people want to have as few restrictions as possible,” Lee said.
Hong Kong has seen 2.26 million cases of the virus since the onset of the pandemic, and 10,984 deaths according to the government’s Covid dashboard on Tuesday.
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