Chaotic Property Recovery in Hong Kong Amid Reopening

Hong Kong’s real estate agents and commercial landlords are discovering that the reopening of the border and the return of Chinese tourists do not necessarily guarantee a widespread economic boom for the city. Despite the fullness of restaurants in the Central business district and the crowds drawn to the Clockenflap Music and Arts Festival, as well as the high foot traffic in shops in Causeway Bay during the evenings, there are concerning indicators.

Although apartment sales are picking up, with the city’s largest developers quickly selling off hundreds of flats, there is a sense of caution in the property market. Sun Hung Kai Properties Ltd., for instance, bought a prime commercial site at a lower-than-expected price. This sale illustrates the hesitation of business elites toward the economic recovery of Hong Kong and the property market.

CBRE, a commercial real estate services provider, reported that the vacancy rate for Grade-A office buildings hit a record high of approximately 15% last year. Financial companies were the largest tenants, occupying 27% of the total leasing volume. However, with Western investment banks decreasing their China exposure and laying off staff, who will take on those expensive leases?

Real estate agents are optimistic about the return of mainland enterprises following the border reopening, but instead of offices, Chinese companies appear more interested in industrial buildings. China Resources Group, a state-owned enterprise, was the largest investor in Hong Kong’s commercial real estate last year, spending HK$7.8 billion on four deals. One of its logistics subsidiaries purchased two warehouses from Kerry Properties Ltd. for HK$4.6 billion in May. Despite the ongoing trade war with the US, only 2.5% of Hong Kong’s warehouses are unoccupied, according to CBRE.

The difference in vacancy rates is partly due to supply. Hong Kong received 4.3 million square feet of new office space last year, the most since 2008, but only 20% of the new stock was absorbed by the end of the year. Most of the new supply came from the eastern side of Kowloon, where the government is transforming the city’s old commercial airport into a significant business district.

In contrast, new warehouse space has been scarce. This year, we can anticipate 5.4 million square feet of new warehouse space, the highest since 1992, but it will mostly come from a joint venture project that Alibaba Group Holding Ltd.’s logistics unit Cainiao Network is developing at the Hong Kong International Airport, with half of the space dedicated to its own use.

Hong Kong’s recovery is uneven and complicated as it emerges from self-imposed isolation. Commercial property, which has historically been a dependable barometer of business sentiment, reflects this.

Therefore, it is worth considering if the government has the appropriate policies. Chief Executive John Lee is eager to restore Hong Kong’s position as Asia’s leading financial hub, even as global banks decrease their workforce. In the meantime, the city’s significance in international trade is being sidelined. The commercial real estate market in the city is telling him that it is time to shift his focus.