[ET Net News Agency, 24 November 2020] Hong Kong's limited housing supply may help save
the city's residential market from a sharp correction amid COVID-19 fallout, according to
a report S&P Global Ratings published today, titled "Hong Kong's Tight Property Supply
Becomes An Advantage."
"We anticipate Hong Kong residential property prices will fall a further 5% in 2021
after sliding by about 7% as at end October 2020 from their peak in June 2019," said S&P's
credit analyst Edward Chan.
In an unlikely turn of events, conditions will be tougher for landlords than developers,
who are usually more susceptible to cyclicality. Retail and commercial properties might
have a harder time recovering from prolonged economic stress in the city. Even without
lockdowns and curfews as elsewhere, comprehensive pandemic measures in Hong Kong have
exacerbated pre-existing economic problems. The special administrative region's GDP has
shrunk for a fifth straight quarter, on year-on-year comparisons as of Sept. 30, 2020, and
unemployment stands at a 16-year high of 6.4%.
Given the jobless rate may not have peaked, the credit rating agency sees further
weakness in residential prices. During the past two decades, Hong Kong property prices
tended to bottom only when the jobless rate had peaked or was about to peak.
A shortage of housing remains a safeguard against larger price plunges, S&P thinks.
Annual private housing completions are down 30% during 2010-2019 compared with the
previous decade, though the population has been rising. Vacancy rates have been falling,
and many developers have delayed launches this year amid uncertainty. S&P believes
transaction volumes in the primary residential market will rebound in 2021 as social
distancing measures gradually ease, and sales launch on new developments.
The expected rebound in home sales volume should shield Hong Kong developers from
weaknesses in their rental portfolios. It believes the situation is tougher in the retail
and office segments of Hong Kong's property markets.
S&P believes landlords will continue renewing most of their retail leases at lower rates
(negative reversions) in 2021. Retail sales have been hit hard by the pandemic, reduced
tourism, and high unemployment. Rated landlords with high exposure to high-end shopping
are more exposed than peers focused on the mass market, it noted.
Rising office vacancies point to negative rental reversions in 2021. In particular, spot
office rents in traditional prime business districts, such as Central, have dropped by
more than 20% from a peak in early 2019 and likely have further to go. Non-prime office
areas have held up better, likely due to their lower base.
S&P's sensitivity analysis shows rated landlords have adequate rating buffers. To
trigger potential negative rating actions, their Hong Kong retail and office rental income
would need to drop to at least their fiscal 2015 levels. It thinks this is unlikely to
happen because negative office rental reversions for prime office properties only began in
the third quarter of 2020. For example, Swire Pacific Ltd. (00019) was still recording
positive office rental reversion at the end of September 2020, and Hongkong Land Holdings
Ltd. only lowered new rents in its Central office portfolio in the third quarter of 2020.
"Rated property companies have buffers to make it through another year without a change
to credit quality," said Chan.
COVID-19 has sparked a secular shift in office demand globally. S&P thinks
work-from-home (WFH) will continue to be adopted, to a lesser capacity, even after the
COVID crisis has passed.
This supports the agency's negative view of global office space. However, in Hong Kong,
the WFH impact could be slower and lower due to its density of space and world-class
transportation. Even with these distinctive factors supporting incentives to work in the
office in Hong Kong, a global paradigm shift might still change the local landscape. (KL)