Hong Kong Property Prices High and Still Rising

Hong Kong’s towering home prices might rise another 10% this year—all the more reason to shun developers and buy retail.

That might not make sense at first glance, but the real estate boom hasn’t benefited developers in the city much in the last seven years. There’s been a disconnect, as JPMorgan Chase & Co. analyst Cusson Leung notes, between the city’s residential prices—up 200% since 2009—and stocks like Li Ka-shing’s CK Asset Holdings Ltd. and Henderson Land Development Co., Bloomberg reported.

JPMorgan’s Leung says that among reasons for this are investor skepticism that current home prices are sustainable, and the developers themselves. These companies are failing to monetize their assets; face a lot of competition; and crucially, are stingy about sharing their huge cash chests as dividends and buybacks.

There’s very little chance prices in Hong Kong will crash, barring an external shock on the order of the 1997-98 Asian crisis or the 2008 global financial crunch, both of which provoked collapses.

With savings rates at banks so low, and developers happy to top up mortgage borrowing, real estate is still seen in Hong Kong as the safest store of wealth. And it’s going to take a lot more than four Fed rate hikes this year to kill the market—even a full percentage-point increase is peanuts.

That’s assuming banks, flush with deposits, pass on those rate hikes, which Hong Kong mirrors to keep its currency’s peg to the US dollar intact. On average, lenders’ loan-to-deposit ratio is 65%, compared with 79% at US financial institutions.

The prime lending rate, currently 5%, was last raised in March 2006 and has been falling from a peak of 8% in October 2006. Even if banks did raise prime rates, Hong Kong property gains are likely to slow rather than reverse.

JLL, a real estate consultancy, forecasts residential capital values rising 10% this year, down from a 15% pace in 2017, as more supply comes on the market.

Leung sees prices increasing 10-15% this year. While homebuilders lack investor love, there are property companies that are seeing gains. Shoppers from China, after years shunning Hong Kong for the brighter lights of Tokyo and Seoul, are returning, and retail is picking up in a city where e-commerce hasn’t taken off as it has in the mainland. The future seems bright again.