Mainland Chinese Buyers Disappear From Hong Kong Real Estate

(Bloomberg) --

The world's priciest property market has lost its most important source of inbound investment.

Mainland Chinese buyers are shying away from real estate in Hong Kong as the coronavirus pandemic clouds the economic outlook and keeps investors from traveling to the city.

No commercial property transactions in the first quarter involved a buyer from mainland China, the first time that's happened since 2009, according to CBRE Group Inc., which tracks deals over HK$77 million ($10 million). It's in stark contrast to a few years ago when Chinese investors were snapping up offices and retail space for eye-popping prices.

While Hong Kong has won plaudits for keeping the spread of Covid-19 under control, the virus hit just as the city was starting to recover from months-long pro-democracy protests that sparked pitched street battles and violent clashes between mainland Chinese and Hong Kong residents. Bloomberg Economics estimates the city's small and open economy will be whipped by convulsions in global demand and trade, contracting around 2% in 2020.

“A lot of mainland buyers are taking a step back because of the economic outlook and the conflicts that made them feel unwelcome,” said Reeves Yan, head of capital markets at property services company CBRE.

Capital controls imposed by Beijing on money flowing out of China are also hurting real estate in Hong Kong, Yan said.

The absence of Chinese investors has contributed to lower prices, considering how aggressively some used to bid. In 2019, little-known Chinese company Henglilong Investments Ltd. teamed with Hong Kong-based Gaw Capital to buy a pair of office towers from Swire Properties Ltd. for $1.9 billion, the biggest office transaction that year.

Office prices in Hong Kong declined 8.5% in February from a year earlier, latest data from the city's Rating and Valuation Department show.

The city's luxury residential market is feeling the impact too. Covid-19 has deterred people from traveling to Hong Kong for site visits considering all travelers arriving in the city are required to undergo a 14-day quarantine period.

Wealthy individuals from China used to dominate the high-end home market with about 60% of international buyers hailing from the mainland over the past 10 years, according to Savills Plc. Prices for luxury properties across Hong Kong dropped an average 4.5% in the first quarter from a year earlier. The area around West Kowloon station, particularly favored by mainland Chinese, slumped almost 7%, Savills data show.

“The majority of the buyers are locals,” Raymond Lee, Savills CEO of Hong Kong and Greater China said at a media briefing last month.

What domestic demand there is, however, remains robust. Hong Kong recorded its best weekend for secondary apartment sales in seven years last weekend. There have been no local Covid-19 infections in the city for 14 straight days.

“Hong Kong people expect Covid-19 to be under control gradually and this has improved market sentiment,” Louis Chan, CEO for Centaline Property's residential division, said.