Low Oversupply Risks Prevent Property Price and Investment Volume from Crashing
According to CBRE Hong Kong's special report, How Will the Rate Hike Affect the Hong Kong Real Estate Market? - the Hong Kong real estate market is in a healthy position to overcome the recent and future interest rate hikes.
The interest rate increase made in the US in December 2015 will have a limited immediate impact on property investment volumes and capital values in Hong Kong because the adjustment was widely anticipated, and a better balance between market demand and supply will shield the sector from a dramatic correction.
"The Hong Kong property market is far better placed today to weather the hike compared to previous interest rate upcycles," said Marcos Chan, Head of Research, CBRE Hong Kong, Macau and Taiwan. "The current real estate sector, both domestic and non-domestic, has benefited from multiple factors, including a bigger pool of Chinese investors and end-users; sustained demand from global institutions; limited pressure on vacancy; and a lower gearing ratio."
Hong Kong interest rates have remained historically low and flat for the last seven years, following US measures to combat the global financial crisis (GFC). Prolonged low interest rate levels attracted a surge of investors and occupiers, particularly from mainland Chinese individuals, companies and institutions. Many of these groups have chosen Hong Kong as their base and platform to do business and make global investments.
The influx of demand significantly increased the capital value of all property sectors, making real estate a preferred asset as it outperformed other asset classes. Since 2000, the accumulated growth of total return for commercial and residential property increased by more than 2.4-fold and 1.7-fold respectively. During this same period, the annual return on commercial and residential property averaged 16% p.a. and 11% p.a. respectively, well above the Hang Seng Index (8% p.a.).
Capital Value Growth of Different Property Sectors Post GFC
Balanced Market with Low Oversupply Risks
The broader base of demand from locals, mainland Chinese and global investors, coupled with low vacancy and limited new supply across all property sectors has protected the real estate market from noticeable corrections. The market has remained stable in recent quarters despite the slower sales momentum.
While the transaction volume from mainland Chinese investors in Hong Kong may slow due to higher transaction costs, the group will remain an integral source of demand for residential and commercial real estate in the years to come. The equitable balance between demand and supply will prevent property prices from a drastic drop, even if demand continues to soften as interest rates climb.
Real Estate Market Crash Unlikely
"Most investors with a mid-to-long term investment horizon have already taken into account the interest rate factor when making their investment decisions," said Kam-hung Yu, Senior Managing Director, Investment Properties, CBRE Hong Kong. "The rate hike was widely anticipated, so a market crash will only occur if there is a serious deterioration in the overall economy. That said, should any major event damage market confidence and trigger a major fire sale, there is plenty of room for property prices to correct."
Property prices today are already at or near record high levels, offering a higher base of comparison. Government statistics provided by the Rating and Valuation Department show that residential, office and retail capital values in Hong Kong have climbed 89%, 87% and 104%, respectively, over the past five years. With such big margins already on hand, vendors have significant room to cut prices to ensure sales, before hitting their bottom line. Additionally, the risk of property prices spiking is restricted because of the market's appetite for higher returns.
"Despite the likeliness that financing costs will trend up over the next few years, future rate hikes will be mild and progressive," said Mr. Yu. "A substantial increase would strengthen the USD and potentially damage external trade in light of continued quantitative easing by China, Japan and Australia."