Hong Kong’s property market may need more help from the government in 2023

Beijing should optimise pandemic prevention and control measures next year as it seeks to better coordinate policies with economic and social development, state media reported on 7 December, after a meeting of the Communist Party's Politburo.

Testing requirements and travel restrictions have been relaxed, and people infected with COVID-19 who have mild or no symptoms are, for the first time, allowed to isolate at home instead of in centrally managed facilities.

The guidelines represent a significant shift away from the strict policy Beijing has maintained for the last three years, which involved quashing outbreaks through mass testing, stringent lockdowns and border closures.

It clearly signifies that the Party is moving away from its “zero COVID” policy.

The announcement follows protests in several cities against the strict lockdowns, which led to some cities loosening restrictions, but the new guidelines go further.

The latest national guidelines state that mass testing across cities is no longer required. They also take a more measured approach to lockdowns: instead of shutting down cities.

Furthermore, the guidelines do not lift testing and quarantine requirements for international travellers, which “doesn’t have a rationale if the objective is no longer zero COVID”.

Commenting in an article in the science publication Nature, Adam Chen, a public-health researcher at the University of Georgia in Athens, says Beijing tried to balance the need to protect the nation’s most vulnerable while mitigating economic and social harm.

He says that the government needs to provide clear guidance on handling a surge in infections. “It will test the resilience of the Chinese health system.”

This is not to say the mainland does not have other hurdles to overcome, such as vaccine hesitancy and the poor numbers of elderly who have received their third dose.

China will focus on stabilising growth, employment and prices while preventing and defusing significant systemic risks, the Xinhua news agency reported last week after the Politburo, chaired by President Xi Jinping, met on Tuesday to discuss the economic tasks for next year.

At the meeting, the Politburo also made arrangements to improve party conduct and moral integrity and combat corruption.

Yet there is still no plan to open the boundary with Hong Kong.

In the year that is almost over, Hong Kong investors, developers, occupiers, entrepreneurs and international funds were eagerly awaiting open customs clearance with the mainland. Unfortunately, unless we get a Christmas miracle, the boundary will likely remain firmly lost for the rest of the year. This and its own pandemic woes have impacted Hong Kong’s real estate market throughout the year.?

Residential market

According to Midland Research Department, up to 5 December, 44,921 private residential transactions were recorded, for HKD391.24 billion in value, down 42.3% in volume and 47.3% in value from 77,807 cases and HKD742.602 billion in 2021. In the primary market, developers froze their stock launches a few times, the latest being after September’s interest rate hike in September. Many secondary buyers preferred to wait for the interest rate to steady before taking the leap; therefore, many potential buyers moved to the leasing market instead.

When I analysed the last four years’ s residential transactions, I found 2022’s average value of secondary sales was down 5.1% YoY but slightly better than 2018 (2.7%), 2019 (1.3%) and 2020 (0.7%).

Last year the market rebounded rapidly, especially the primary market, as developers continued to release inventory at varying sizes and price points. The resultant positive sentiment transferred to the secondary market, leading to owners increasing their asking prices.

Year-to-date private residential transactions are valued at HKD351.362 billion, 47.3% down YoY, 28.9% off 2020, 29.9% off from 2019 and 30.4% down from 2018.

Industrial market

The industrial market recorded 2,413 transactions for HKD24.74 billion up until 5 December 2022, down 36.6% and 35.7%, respectively, from 3,808 sales totalling HKD38.446 billion in 2021. The average value of each transaction up until 5 December was 1.6% (HKD10.253 million), higher than 2021’s HKD10.1 million.

When using size to analyse the pattern of industrial transactions in 2022, I found 1,336 transactions ranging from 200 to 1,000 sq. ft. (saleable area) made up 55% of deals. Transactions in the 200 to 400 sq. ft. range were 5.4% higher YoY. But there were only 475 transactions for more than 1,400 sq. ft. properties, down 55.6% from 2021’s 1,070 cases. Industrial investors preferred smaller properties due to acquisition costs and the yield being unable to offset the interest rate.??

Office market

The office market recorded 780 transactions for HKD20.93 billion up until 5 December, down 41.6% and 59.1%, respectively, from 1,335 cases and HKD51,177 billion in 2021. The average value of each transaction was HKD26.833 million, 30% lower than 2021’s average of HKD38.335 million.

According to size, properties between 200 to 500 sq. ft. (saleable area) registered 548 transactions, to take more than 70% of deals until 5 December 2022. Sales of properties under 200 sq. ft. were 5.4% higher YoY. But YTD 2022 only registered 20 sales of property bigger than 800 sq. ft., down 70.8% YoY from 2021’s 475 sales. Due to the demand for small offices being higher now, investors are more eager to buy those, happy that they are affordable even though the yield cannot offset the interest rate.?

Retail market

Retail recorded 1,119 transactions for HKD19.5 billion up until 5 December 2022, down 37.4% and 39%, respectively YoY, from 1,788 cases and HKD 31,982 billion. The average value of each transaction YTD was HKD17.426 million, 2.6% down on 2021’s HKD17.887 million.

Properties under 200 to 500 sq. ft. (saleable area) were responsible for 548 transactions, more than 70% of YTD deals. Those ranging from 200 to 250 sq. ft. were up 11.9% YoY. But 230 properties bigger than 350 sq. ft. transacted YTD, down 71.8% from 2021’s 814 cases.

Due to social distancing measures, investors found larger shops too challenging and shifted to more manageable properties to reduce pandemic risks and to accommodate the interest rate hike.

Will Beijing's latest moves be enough to entice investors back into the market, or will they wait for more evident signs of border reopening? This year’s Commercial and Residential transaction value dropped HKD407.797 billion YoY, primarily due to the interest rate hikes.

Investors chose time deposits as a typhoon shelter, with some banks offering more than 5% interest. According to the Hong Kong Monetary Authority’s statistics, time deposits had swelled by 27 % by September this year, adding about HKD621.018 billion.

Winter is peak influenza season, and many people will be travelling across the country for next month’s Lunar New Year and spring festival, further spreading infections. Without additional support, the eased restrictions might not help businesses to recover from protracted lockdowns or remove the social stigma attached to COVID-19. Hong Kong should consider deploying resources to assist economic recovery in 2023.

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