Concrete Analysis | In a whiplash-inducing Hong Kong property market, tenants paying less are better than no tenants at all

In April, a flat in Taikoo Shing rented out for just around HK$25,000 (US$3,225). That would be unspectacular if not for the fact the previous lease agreement was for HK$32,000 – a roughly 20 per cent drop in rent.

That is a reflection of the property climate in Hong Kong right now, a market that is going to move week to week rather than quarter to quarter for the foreseeable future. This is not to say the sky is falling and the rug is being pulled out from beneath us – it is just a matter of shifting priorities in what is shaping up to be a post Covid-19 world.

Hong Kong’s sensitive property market is nothing if not sentiment driven, and in recent weeks that sentiment has been affected by unemployment figures and mandated business closures, as well as European, UK, American and local stimulus packages, among a host of other factors. It has led to a fair amount of ping-ponging in the market, where news is relatively good one day and dire the next. Sales transaction figures have trended up one week and down the next since February – it’s enough to give any observer whiplash.

Hong Kong has, traditionally, been somewhat resilient when dealing with precisely this kind of volatility. Unlike so many other places across the globe, Hong Kong is not at an utter standstill, and in that light it has proven slightly insulated from many of the shocks and disruptions that have brought other markets to a screeching halt. And while no market can ever be an island any more, the special administrative region is proving itself to be among the safest of safe havens. Make no mistake, Hong Kong will be impacted by the current state of affairs too, but the relative success we have seen in corralling the coronavirus and the flight to safety for investors will go a long way to buoying the property market.

For Hong Kong right now, the question is not so much one of how much up and down the market can bear, as it is of how long this will need to be endured. We are not alone. There is no place in the world that is untouched by Covid-19. Prices are going to drop a bit more, and there is more anxiety in the rental market vis-a-vis owners who want to cover their mortgages. But that means there is also more room to move and therefore more flexibility. A tenant paying less is better than no tenant at all when landlords are coming from a high base. Deals like the lease agreement in Taikoo Shing are going to be the standard for the foreseeable future. At the upper end of the spectrum, leases that clocked in at HK$75,000 a year ago are available at HK$55,000 now. Despite a surprising amount of activity in the sales market, the rental market across all sectors is going to experience a great deal more downward pressure.

Landlords are savvy in light of the situation and understand that a willingness to compromise right now is to their benefit in the long term. Corporate tenants struggling to manage businesses and equity portfolios will be looking at ways to balance reduced cash flows amid uncertainty, but that does not mean the city’s star is dimming.