ASIA PACIFIC WATCH DECEMBER 2019 Note: Forecast trends are based on the ‘base case’ scenario as of July 2019. Source: Oxford Economics At the time of writing, political protest and related violence in Hong Kong continue into their seventh month. Unsurprisingly, Hong Kong’s economy has been negatively impacted, and it is likely only part way through a sustained economic contraction although the base case still sees positive GDP growth for the full year of both 2019 and 2020. Impacts on Hong Kong’s real estate markets have been variable – with hotels and retail worst hit but logistics holding up well. Tourist arrivals (and thus hotel occupancy and room rates) have plummeted, and retail sales (and rents) have contracted through 2019. After recording its largest ever investment volume of standing real estate assets in 2018 (the largest among APAC cities and fifth highest globally) transaction activity has fallen this year – but will still be comparable with annual volumes prior to 2017. As we noted in a Watch report on Hong Kong at the start of 2018, this wealthy city (GDP per capita is one of the highest in the world) has nonetheless slumped to 71 st globally in Mercer’s 2019 annual quality of life survey. That survey was undertaken before the protests began this year. Yet Hong Kong is highly ranked in our Winning Cities framework for its long-term structural drivers of real estate. In our short- to-medium term RARE framework, though, we are underweight to Hong Kong (and have been for several years now) given the city’s very low yields offered by its markets. AN ECONOMY IN RECESSION Hong Kong’s economy contracted in both 2Q and 3Q this year, leaving it 2.9% smaller YoY as of end September 2019. The US-China trade war tensions had been a headwind given it has a very open, globally-exposed, trade-driven economy, but the protest- related disruptions became an added challenge when some domestic activity shut down. Compared to its 25-year long term average GDP growth rate of 3.6%, the projected annual 2.0% pace for the coming five years is a notable slowdown (Oxford Economics). Historically, Hong Kong’s growth was highly volatile and also suffered from periods of both deflation and higher-than-desirable inflation. The Oxford Economics downside scenario we have adopted globally sees a five-year average annual growth rate of just 1.5% but if events locally continue to deteriorate, risks further to the downside must be anticipated. HONG KONG GDP AND CPI HISTORICAL AND FORECAST TRENDS Data points through end of November 2019. Change represents month-over-month change. PRINCIPAL CONTRIBUTORS: Shane Taylor Juliet Cha 19:003-12 23,293.91 Nikkei 225 26,346.49 Hang Seng 2,871.98 Shanghai Composite 109.52 Yen/Dollar 1.6% -2.1% -1.9% 1.38% -6% -4% -2% 0% 2% 4% 6% 8% 10% 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F 2021F 2022F 2023F 2024F (change pa, %) GDP CPI
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ASIA PACIFIC WATCH DECEMBER 2019
Note: Forecast trends are based on the ‘base case’ scenario as of July 2019.Source: Oxford Economics
At the time of writing, political protest and related violence in Hong Kong continue into their seventh month. Unsurprisingly, Hong Kong’s economy has been negatively impacted, and it is likely only part way through a sustained economic contraction although the base case still sees positive GDP growth for the full year of both 2019 and 2020. Impacts on Hong Kong’s real estate markets have been variable – with hotels and retail worst hit but logistics holding up well. Tourist arrivals (and thus hotel occupancy and room rates) have plummeted, and retail sales (and rents) have contracted through 2019. After recording its largest ever investment volume of standing real estate assets in 2018 (the largest among APAC cities and fifth highest globally) transaction activity has fallen this year – but will still be comparable with annual volumes prior to 2017. As we noted in a Watch report on Hong Kong at the start of 2018, this wealthy city (GDP per capita is one of the highest in the world) has nonetheless slumped to 71st globally in Mercer’s 2019 annual quality of life survey. That survey was undertaken before the protests began this year. Yet Hong Kong is highly ranked in our Winning Cities framework for its long-term structural drivers of real estate. In our short-to-medium term RARE framework, though, we are underweight to Hong Kong (and have been for several years now) given the city’s very low yields offered by its markets.
AN ECONOMY IN RECESSION Hong Kong’s economy contracted in both 2Q and 3Q this year, leaving it 2.9% smaller YoY as of end September 2019. The US-China trade war tensions had been a headwind given it has a very open, globally-exposed, trade-driven economy, but the protest-related disruptions became an added challenge when some domestic activity shut down. Compared to its 25-year long term average GDP growth rate of 3.6%, the projected annual 2.0% pace for the coming five years is a notable slowdown (Oxford Economics). Historically, Hong Kong’s growth was highly volatile and also suffered from periods of both deflation and higher-than-desirable inflation. The Oxford Economics downside scenario we have adopted globally sees a five-year average annual growth rate of just 1.5% but if events locally continue to deteriorate, risks further to the downside must be anticipated.
HONG KONG GDP AND CPI HISTORICAL AND FORECAST TRENDS
Data points through end of November 2019.Change represents month-over-month change.
PRINCIPAL CONTRIBUTORS:Shane Taylor
Juliet Cha
19:003-12
23,293.91Nikkei 225
26,346.49Hang Seng
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Composite
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Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.
Source: Census and Statistics Department Hong Kong Special Administrative Region as of November 2019
Note: Vacancy rate for 2019 is as of 3Q2019. All data based on prime logistics. Sources: CBRE ERIX, CBRE Global Investors
HONG KONG TRANSACTION VOLUME BY SECTOR
HONG KONG OFFICE VACANCY RATES
INVESTMENT VOLUMES DOWN IN 2019Hong Kong usually ranks in the top five APAC metros for investment volumes and both 2017 and 2018 saw a strong surge in transactions of both standing, income-producing assets and of land. A large retail portfolio trade in 2017 and several office mega deals (individual transactions greater than USD 1 Bil) last year helped Hong Kong to total USD 18.9 billion of standing asset sales in 2017 and USD 26.1 billion last year (Real Capital Analytics) and elevated it to be APAC’s most traded metro-level real estate market for both years. Those trends have moderated: as of 31st October, only USD 14.3 billion of standing assets and just USD 13.1 billion of development sites had traded in 2019 with slim chances of much more changing hands this year.
HONG KONG LOGISTICS VACANCY AND RENTAL GROWTH
OFFICE VACANCY RISING OVERALLHong Kong’s highly cyclical office market is currently experiencing more challenging conditions and it recorded an overall vacancy rate of 6.5% as of end September, up from 4.8% one year prior (CBRE). However, there is a wide variation by sub-market, with Hong Kong Island enjoying lower vacancy of just 3.8% and Central, the largest and most important submarket, had just 2.5% vacancy. Little new supply is to deliver in Central in the next few years and this helps explain why its rents are the world’s most expensive by a wide margin. But city-wide rents are under downward pressure and have slipped around -1.5% this year and likely with further to fall in the coming year. CBRE reports that prime office yields as of 3Q 2019 are up 9 bps since 3Q 2018.
RETAIL AND TOURISM SECTORS HARD HITSeveral major high street retail precincts – such as Causeway Bay, Tsim Sha Tsui, Mong Kok – have been sites of protest and both Central and suburban shopping centers have not been immune as sites of violence, thus it is unsurprising that retail sales volumes have fallen 20.4% YoY as of September (Census and Statistics Department of Hong Kong). One of Hong Kong’s biggest drawcards is its reputation as a shopping mecca: this is a dominant theme in how Hong Kong promotes itself to the world and attracts tourists. Hotel rates have in some cases halved from a year ago as tourist numbers have fallen. HKRVD data (to September, as of November 2019) suggest the prime retail capital value index has fallen over 12% since peaking in November 2018.
LOGISTICS STILL SUPPLY CONSTRAINEDHong Kong has long served as one of the world’s major logistics hubs and its world-class airport and seaport have been recently complemented with better land crossings including the 55 km bridge across the Pearl River Delta to Macau and Zhuhai. In the next four years, very few development projects will deliver thus the net logistics space added will be a fraction of the LTA. World-record-high logistics rents should edge higher and in our latest forecasts/house view we expect prime rents may expand by an average 2.6% p.a. in the coming five years. This is a deceleration from historic rent growth (5.8% for the past ten years), but the sector should prove to be the most defensive of the main property types in Hong Kong.
Note: Transactions include properties and portfolios USD 10 million and greater. Source: Real Capital Analytics
Note: Grade A office vacancy rates are plotted here. Source: CBRE ERIX
