Last week saw a plot of land in northern Hong Kong sell for less than market experts had predicted amid concerns that the Hong Kong real estate market is slowing down. While this particular plot was in the suburbs of Tai Po it was nonetheless a major concern for investors. The next public sale of land will occur on 26 February and while there are hopes that this plot, in one of the more central areas, will perform better in relative terms all eyes will be on the sale.
The major concern amongst investors in Hong Kong real estate is the fact that a slowdown in the Chinese economy is most certainly having an impact on the region. When you bear in mind that Hong Kong real estate attracts one of the highest valuations in the world, any downturn in confidence could have a dramatic impact.
Credit rating agencies concerned
A recent report by credit rating agency Standard & Poor’s confirmed the suspicions of many real estate investors in Hong Kong. The agency believes that the price of homes in the city will fall by between 10% and 15% during 2016, land prices will step down and there will be a minimal increase of up to 5% in transaction volumes. These figures do not make good reading especially with many experts believing that the Chinese economic downturn is only in its relatively early stages and there may be more bad news to come in the short to medium term.
Dependency on property related activities
The Fitch credit rating agency also had much to say about the Hong Kong property market estimating that approaching 20% of the city’s economic output is related to property activity. The potentially enormous knock-on effect of any downturn in the Hong Kong property market does not bear thinking about as it will impact employment and the wealth of individuals and companies.
While it may be a little too soon to ring the alarm bells, we only need to look at the impact the downturn has had on Chinese real estate companies to see how quickly markets can turn. The last few months have seen a number of Chinese real estate companies forced to restructure their debt with some unable to pay the interest on their bonds. As the number of companies struggling to refinance their debt continues to grow this has a major impact upon confidence and the risk/reward ratio within financial markets.
Is there any good news?
The good news is that Standard & Poor’s is not expecting a massive downturn in real estate prices across Hong Kong at this moment in time. Indeed there is a suggestion that prices could fall by up to 30% without having any major impact upon the credit ratings of Hong Kong’s wealth property developers. While this is obviously encouraging, we would certainly not want to be testing that 30% downturn cushion any time in the near future!
It is obvious that any further downturn in the Chinese economy will impact the Far East but areas such as Hong Kong, often compared to the London real estate market, are probably in a better position than most to withstand any dramatic fall in worldwide property prices.