HONG KONG (Reuters Breakingviews) - It’s the long views that elevate Hong Kong’s skyscrapers. Hongkong Land, for example, has owned most of the buildings in its central Landmark complex since 1901; Swire Properties’ involvement in the once-industrial area of Quarry Bay dates to 1882. Shorter-term investors should put some faith into these now-struggling developers.
Between June 2019, when the anti-government protests started, and the pandemic-induced trough in mid-March, shares in $9 billion Hongkong Land and $16 billion Swire Properties roughly halved. Those of Sun Hung Kai Properties, the $38 billion owner of the city’s iconic IFC and ICC towers, home to international banks, law firms, and fund managers fell 30%. All three have partially recovered along with broader equities.
Commercial rents in Hong Kong slumped 11% year-on-year in the first six months of 2020, and are expected to drop 17% for the full year, according to property services outfit CBRE. It’s the weakest forecast for any big city globally. Geopolitical tension is weighing on the market, with a new national security law stoking fears about the city’s future.
That helps explain why Hongkong Land, Swire and Sun Hung Kai are trading at 26%, 44% and 51% of book value, respectively – all near-decade lows. There are good reasons to think they can get back to their 50-60% averages over the last five years, though.
One is working patterns. Hong Kong has one of the highest office densities and people living in some of the tightest quarters. That should curb the burgeoning work-from-home effect. Despite concerns about an exodus of foreigners, fresh demand may pick up from mainland China. The city centre is likely to hold up. Vacancy rates there have reached a 14-year high, at 5.6%, but below the citywide rate of 7.9%. For the newer Kowloon-side eastern office area it’s 13.9%.
Any rebound will be gradual. Hong Kong isn’t getting the same quick boost from the mainland as it has following past crises. After the SARS epidemic in 2003, property stock prices recovered in four months. It took five months after the global financial crisis. The climb back up is steep, but history suggests tower landlords can scale new heights again.
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