Hong Kong: Is Business as Usual after August Turmoil?

Hong Kong: Is Business as Usual after August Turmoil?

Although Hong Kong experienced its share of the market turbulence last month with the Hang Seng falling from a high of 22540 on 8th August to 19386 nine days later, it has since reached a new peak of 24089 on the last day of the month. Clearly, Hong Kong stocks are very much part of the ‘˜China story’ and the same has been the case for the territories property market up until now. The Colliers International Hong Kong Property Market Overview published in April 2007 was optimistic and cited the following big picture influences: benign effects of Chinese growth (chiefly the boost to Hong Kong as an entrepot and the numbers of mainland tourists), local stock market growth and the expectation that interest rates would come down in the US.

Hong Kong Harbour
Hong Kong Harbour [photo credits to OZinOH]
The optimism in the Spring centred around the upcoming inauguration of the Western Corridor, providing improved transport between Shenzhen and the northern New Territories, and the very impressive HK$1.8bn paid by Sun Hung Kai for the 12 Mount Kellet Road site on the Peak (which translates into accommodation costing HK$42,196 per square foot).

From April to August, Hong Kong’s stock and property market both seemed to doing very well. This sunny picture still obtains, according to CB Richard Ellis’s 23 August press release, which attributes the level of liquidity in Hong Kong’s markets to the increased freedom for mainland Chinese capital to find a home in Hong Kong under the Qualified Domestic Institutional Investor schemes. How easy it is, exactly, for Mainland Chinese to invest in Hong Kong Property as opposed to equities, is not entirely clear but if ways can be found to take capital abroad through gambling in Macau – as it can – investing in Hong Kong real estate should be feasible.

The attractiveness of the Hong Kong property market to Mainland Chinese is enhanced by the slight relative decline of the HK dollar against the Yuan as the HK dollar is pegged to the US dollar. The Hong Kong Monetary Authority is famously laissez faire in its policies so the exchange rate of the HK dollar is unlikely to lose its link to the US dollar, and for the time being no harm will come of this.

However, the territory’s economy could be seen as a pressure valve on the side the Chinese boiler and although the property market is large and robust (like the stock market), there is no doubt that any serious disruption to business confidence on the Mainland would have serious consequences for real estate investments as entrepreneurs liquidated assets to shore up balance sheets there.

Furthermore, important players in the Hong Kong property sector have been counting on significantly extending their Mainland China portfolios. Cheung Kong (Holdings), for instance, forecast that the proportion of its earnings deriving from Mainland China would rise from the current level of 18% of total earnings to as much as one third by 2010. Revealingly, Justin Chui, executive director, said: “If there are no bubbles, you don’t want to drink the beer. It’s just plain water, and there’s no incentive to invest.”

Possibly, Hong Kong is in bubble territory with striking gyrations in money supply and credit since Spring 2006. However, lending for property investment has been fairly stable over the same period. One statistic to watch is the Monetary Authority’s monthly report on mortgage borrowing; for July new loans were up 0.7% but the actual drawing down of funds fell by 13.5%.

One of the most interesting recent developments in the Hong Kong market was the introduction of the Sun Hung Kai Financial/ABN Amro property derivative based on the University of Hong Kong’s Hong Kong Island Residential Price Index and brokered by Colliers. As yet, we’ve found no way to access the University’s indices on property prices.