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Hong Kong protests

Protests dim prospects for Hong Kong's commercial properties

Real estate investors turn back on China-ruled territory in favor of Tokyo

Investment in high-end Hong Kong real estate fell 65% on year in the July-September quarter, while forecasts for the future remain gloomy.   © Reuters

SINGAPORE -- Months of violent protests in Hong Kong have sent the value of commercial property investments spiraling.

Total investment in properties valued at over $100 million Hong Kong dollars ($13 million) fell 65% on year to HK$6 billion in the July-September quarter. This is about 25% of the HK$25.7 billion quarterly investment average over the last five years, according to data supplied by real estate services company Cushman & Wakefield.

Hong Kong investment volume dipped 38% in the 12 months to under $20 billion, down from more than $30 billion last year.

"The escalating political unrest has injected growing uncertainty into the market with no end in sight," said Reed Hatcher, head of research at Cushman & Wakefield's Hong Kong office, to the Nikkei Asian Review. "Conditions for underwriting deals have become challenging for foreign private equity real estate funds."

At the same time, interest in Tokyo's commercial property sector has spiked in the 12 months to the end of June, with Japanese capital fueling almost $20 billion in total transactions to overtake Hong Kong as the top draw for real estate investment in the Asia-Pacific region.

"Tokyo's rise up the rankings ahead of Hong Kong comes as no surprise due to its strong fundamentals, fed by a tourism boom and investment momentum in the run-up to the [2020] Olympics," said Francis Li, Cushman's head of capital markets for greater China.

Investment volume into Singapore also surged in the July-September quarter to $16.7 billion Singapore dollars -- up 49% from the SG$11.2 billion recorded over the previous two quarters combined.

Notable transactions included Allianz Real Estate and Gaw Capital Partners' acquisition of DUO Tower, and the SG$1.58 billion buyout of Galleria by M+S, the joint state-investment venture of Singapore and Malaysia.

There was also Angelo Gordon and TCRE Partners' purchase of Bugis Junction Towers from Keppel Real Estate Investment Trust for SG$547.5 million.

The ongoing protests in Hong Kong are driving real estate investors to more stable markets, like Tokyo, Singapore and New York.   © Reuters

According to Christine Li, head of research for Singapore and Southeast Asia at Cushman, full-year investment volume in the city-state will top that of 2018, as yields for prime office space remained stable. "Slight yield compression could occur in 2020 if investor demand for assets in safe havens like Singapore increases amid greater unrest in Hong Kong," Li said.

Only 18 transactions were concluded in Hong Kong in the July-September quarter, down 50% on year, Cushman & Wakefield said. In terms of volume and transactions, overall investment in Hong Kong's commercial property market -- which includes office and retail space -- was at the second-lowest level in six years for the quarter.

Despite the decline, Hong Kong still led other financial hubs like Seoul, Shanghai and Singapore in terms of real estate investments in the year ending June, reflecting Hong Kong's eye-watering property values before the protests began in May.

But prospects for the territory look grim.

"The outlook for investment in commercial property in Hong Kong is likely to remain muted over the remainder of the year," said Hatcher. "Investors are likely to largely remain on the sidelines."

A dearth of major en-bloc office transactions and a slowdown in strata-title sales in Hong Kong saw investment in the sector plunge 73.8% on year to HK$1.62 billion in the quarter, Cushman's data showed.

One of the few deals that stood out was SOCAM Development's sale of 93 Wai Yip Street in Kwun Tong for HK$387 million.

Research from Colliers International, another real estate specialist, confirmed Hong Kong's dismal commercial property market, describing it as 'slowing' -- the company's lowest rating.

Colliers said that supply of prime office space was up 633,000 sq. feet, while demand fell 144,000 sq. feet in the July-September quarter. The company also noted that new leases were declining, with overall net takeup negative. It forecast a 13.1% on-year contraction for 2020.

"Continuing demonstrations have affected investors' appetite in the office sector in the third quarter, despite the retail sector being most affected," said Zac Tang, research manager at Colliers. He noted that the cautious market sentiment reflects deferred expansion by multinational companies and large banks.

Tang said vacancy rates continued to rise and are likely to increase further, despite a new supply of low-priced office space for 2020. "Investment momentum will likely remain slow for the rest of 2019, while price levels could [decline further] on the back of a weaker rental outlook," he said.

Xiaoxiao Fu, a senior analyst at asset management company CenterSquare, believes Singapore and New York will benefit from "self-inflicted wounds" as a result of protests in Hong Kong and Brexit in the U.K.

"Investors always seek stability over instability, and demand higher returns for less stable assets and markets," she said. "Capital of all sorts will flow out of Hong Kong and London and into markets that are perceived to be less risky."

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