Hong Kong Teflon home prices are virus-proof

Hong Kong’s home prices have proved resilient to months of protests and now the coronavirus epidemic, a one-two punch that the city’s finance chief likened over the weekend to “tsunami-like” shocks. While a hit is probably coming, the world’s least affordable housing market still looks a better place to be than in Hong Kong office or retail property.
Home prices have dropped just 6.1% from their record high in June, as measured by the Centa-City Leading Index compiled by Centaline Property Agency. The index has risen for four weeks in a row through February 9, the latest data, even as the virus shut down swathes of the Chinese economy, slowed Hong Kong tourist arrivals to a trickle and forced many of the city’s financial
employees to work from home.
A number of factors undergird the outlook for housing: the dominance of a small number of family-controlled companies that can influence supply; low interest rates; and limited leverage among home owners. Developers completed 14,000 units last year, 33% lower than 2018, according to Morgan Stanley analyst Praveen Choudhary. By contrast, 31,000 units were built in 2002, just before the outbreak of severe acute respiratory syndrome. That was 35% more than the year before.
High equity levels mean there’s little pressure for home owners to sell. The loan-to-value ratio for new mortgages dropped to 46% in September, from a peak of 69% in 2002, according to Hong Kong Monetary Authority (HKMA). Meanwhile, Hong Kong’s one-month interbank rate, against which most mortgages are priced, has fallen back below 2% this month.
Having risen more than fivefold from their 2003 low, Hong Kong housing prices have attained a Teflon-like response to bad news.
The total transaction value of office and retail properties slumped 12.9% last year to HK$49.6 billion ($6.4 billion), according to Bloomberg Intelligence analyst Patrick Wong.
With Hong Kong’s gross domestic product shrinking 1.2% last year, empty workplaces became a common sight even before the coronavirus outbreak forced people to work from home. By the fourth quarter, office prices had reached the lowest since the second quarter of 2018, according to JLL.
Retail landlords, meanwhile, started slashing rents by 60% this month for tenants that are trying to cope with the dearth of shoppers. The fourth-quarter vacancy rate of 9% in core shopping areas was the highest in five years, JLL’s figures show.
For real estate investors, the best place to shelter may be in cash-rich Hong Kong developers that have a higher exposure to housing. These look better placed to ride out the slump than rivals such as Wharf Real Estate Investment Co., owner of Times Square mall in the prime Causeway Bay shopping district, or Hongkong Land Holdings Ltd., the biggest office landlord in central business district.
In a testing environment, homes can be a refuge in more ways than one.
—Bloomberg

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporte