With No Mainland Chinese Buyers, Hong Kong’s Commercial Real Estate Dives

The most important source of inbound investment — mainland China — has vanished, with huge ramifications for CRE.

The Hong Kong government’s Land Office did something rather unusual. On May 13, it withdrew a major commercial plot it had put up for sale at the site of the city’s former airport at Kai Tak. The Land Office had received four bids for the plot, including from Sun Hung Kai Properties, Hong Kong’s biggest developer by value, but none of them came close to the government’s undisclosed reserve price, prompting the Land Office to pull the offer.

The withdrawal of the lot, only the fourth since January 2018, came after appraisers had lowered estimates of the land parcel’s value by 20% to a range between HK$6.38 billion ($820 million) and HK$10.44 billion ($1.35 billion). But some market insiders say the government had failed to take this sufficiently into account.

“The government overestimated the [parcel’s worth],” said Charles Chan, managing director of valuation and professional services at Savills. The market has corrected, but the [reserve] price was not in line with the market”.

In another part of Kai Tak, another land deal told a similar story. Goldin Financial Holdings Ltd., a Hong Kong-based investment holding company whose shares have fallen nearly 50% in the past six months, had to accept a loss of 21% or $335 million in its sale of an undeveloped residential land parcel it had bought in 2018. It was a desperate effort to raise cash.

“Considering the preliminary stage of development of the property and the significant capital required for the project, the directors adopted a prudent approach to retain more cash for the group’s existing business, against the uncertain outlook in the property market and the overall economic downturn in Hong Kong,” Goldin said in a bourse filing.

Hong Kong’s commercial property sector has been hit by a quadruple whammy over the last couple of years. First, Beijing imposed capital controls on money flowing out of China, much of which had been pouring into Hong Kong real estate. Shortly after that, trade tensions between the U.S and China began escalating, leaving Hong Kong stuck in the middle. Then the city was rocked by non-stop student protests. And now, to cap it all off, there’s the virus crisis.

Hong Kong’s health authorities have managed the threat posed by Covid-19 far better than many other global cities, largely due to the lessons gleaned from previous outbreaks, including the 2003 SARS episode. The city has so far only registered four deaths from Covid-19. But the economic impact of the partial lockdown and the closure of most of its land borders with China has nonetheless been brutal.

The city is already in the throes of its deepest recorded recession, after notching up three consecutive quarters of falling GDP. The 8.9% contraction suffered in the first quarter of 2020 was the biggest since records began.

And the most important source of inbound investment as well as demand for the city’s luxury retail sector — mainland China — has effectively vanished, with huge ramifications for the city’s commercial real estate (CRE).

Continue reading the article on Wolf Street

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