GUANGZHOU/HONG KONG -- What was once the world's most expensive real estate market in Hong Kong has taken a beating since last year, and the recently passed national security bill threatens to trigger a mass exodus of capital.
At Canary Wharf, London's secondary financial district, the potential purchase of Morgan Stanley's European headquarters there became the predominant topic in June. Link Real Estate Investment Trust, based in Hong Kong, is said to be in talks to buy the property for around 400 million euros ($455 million).
If a deal is inked, Link will get its hands on its first-ever building in Europe, according to Hong Kong media. At the end of last year, the REIT announced the purchase of an office building in Sydney for 683 million Australian dollars ($475 million).
The sudden interest in offshore properties is taking place amid a troubled real estate market back home. Home values and office leases once stood at the top of global rankings, but trade frictions and the anti-government demonstrations sparked a shift in investor money starting last year. The novel coronavirus pandemic piled on the situation.
Only 13.2 billion Hong Kong dollars ($1.7 billion) was invested in commercial real estate between January and June, according to real estate services provider CBRE Group, down 70% from the year-earlier first half.
"This marks the lowest for a six-month period since 2009," CBRE writes, citing the year after the global financial crisis. The market capitalization of Hong Kong REITs has dropped more than 20% since the end of 2019.
On-the-ground demand for Hong Kong property has retreated as well. Both travel booking site Expedia and Australian investment bank Macquarie Group have decided to vacate office space in central city buildings.
The American Chamber of Commerce in Hong Kong released a survey Monday showing 36% of its members are considering relocating assets and operations out of the territory.
Vacancies among grade-A offices in Hong Kong's Central financial district touched a 12-year high of 5% at the end of May, real estate services provider Jones Lang LaSalle reports. Vacancies in other districts are also on an upward trend.
Rents, meanwhile, have gone in the opposite direction. During the first quarter of this year, leases have dipped by more than 9% compared to the fourth quarter of 2019. This contrasts with the 2% increases seen in both Tokyo and New York during the same period.
Hong Kong's grade-A office rent will likely dive by 20-25% this year, JLL said Wednesday.
These developments have damaged earnings at major real estate groups in Hong Kong. Since February, Henderson Land Development has cut lease payments by 20-60% for commercial tenants impacted by the coronavirus epidemic. As a result, the company's lease revenue has diminished 10% from a year earlier.
Meanwhile, Swire Properties' investment real estate has apparently incurred an appraisal loss of HK$2.6 billion during the first half of the year.
Property developers are scrambling to respond to the fallout. New World Development has divested more than HK$10 billion worth of non-core assets from its portfolio during the financial year ended June.
Others are hunting for opportunities outside of Hong Kong. Sun Hung Kai Properties has expanded investments in mainland provinces such as Zhejiang. CK Asset Holdings has diversified its portfolio by acquiring British pub operator Greene King last October for 2.7 billion pounds ($3.4 billion).
All the while, neighboring markets have moved to attract the real estate money that has soured on Hong Kong. Singapore's monetary authority launched a grant program for so-called variable capital companies, a new corporate framework targeting foreign investment funds. Taiwan on July 1 established an office promoting the resettlement of people -- and assets -- from Hong Kong.
The future of Hong Kong's real estate market remains bleak. On Tuesday local time, U.S. President Donald Trump signed a bill authorizing sanctions against Chinese financial groups and an executive order that would rescind special trade and travel privileges for Hong Kong.