Hong Kong’s property market is showing signs it may “roll over” as prices drop over the next one or two years with the city’s currency peg linking it to the risk of higher U.S. interest rates, according to MGPA.
Prices of the city’s office buildings may decline as much as 20 percent while home values may fall up to 30 percent during that period, said John Saunders, Asia chief executive officer of MGPA, a private-equity real estate investment firm that manages $10 billion of assets in Asia and Europe.
Hong Kong’s currency peg is creating a “massive” inflation as it forces the city to follow low interest rates in the U.S. even as it benefits from the economic growth in China, Saunders said. The exchange rate regime is set to amplify property market peaks and troughs when macroeconomic trends reverse, he said.
“It’s got all the hallmarks of a market that’s about to roll over,” Saunders, who’s based in Hong Kong, said in an interview on Sept. 2. “We import all the growth from China, then we pay for it with a monetary policy that’s designed to drag the U.S. out of deflation and economic chaos. So it’s massively inflationary.”
MGPA last year sold an office building at 181 Queen’s Road Central that it had owned for about four years to Hong Kong and Chinese wealthy individuals in multiple transactions, Saunders said, declining to give details on the returns.
The Hang Seng Property Index of seven real estate stocks dropped 1.3 percent as of 10:50 a.m. in Hong Kong trading, declining for a third day.
Its $4 billion MGPA Asia Fund III now owns no property in Hong Kong, where it had investment through a previous regional fund, he said. It envisioned Hong Kong to be one of the four geographical pillars alongside China, Singapore and Japan when it started the nine-year fund in 2007, he added.
“We would love to spend some money in Hong Kong,” he said. “But I just think the cycle timing is completely wrong right now. My concern is we’re headed towards another 1994.”
Low interest rates sent Hong Kong office values to record highs in early 1994. Prices of offices in landmark buildings fell as much as 30 percent by February 1995, then Morgan Stanley Asia Managing Director Peter Churchouse estimated. The decline came after Hong Kong followed the U.S. to raise interest rates, suppressing demand for housing and offices, and as China ordered its banks to tighten credit.
Declining Home Sales
Signs of declines have already emerged in the housing market where there are more recorded sales, said Saunders. He cited as evidence waning interest in government land sales, lower apartment transaction volumes and discounts from developers after banks increased mortgage rates more aggressively to offset their lending in yuan.
Home transactions in the city fell to a 30-month low in July, while a land auction earlier last month missed surveyors’ forecasts. The HK$5.5 billion ($706 million) paid by a group including Sino Land Co. and Kerry Properties Ltd. was 33 percent below the median HK$8.25 billion and was the first and only bid.
MGPA has invested just less than 60 percent of capital in its third Asia fund in Singapore, China and Thailand, said Saunders. It also has had investments in Singapore, Malaysia and Japan through its earlier funds.
The firm in June bought a stake in Galleria Chengdu, a shopping mall that opened last year in the capital of China’s southwestern Chinese province of Sichuan, as it seeks to tap rising consumerism among the young in a city with 12 million people, he said.
“We would like to do more of the same, retail in tier-2 cities,” Saunders said. “It allows you to put your hands right into the pockets of middle-class China.”
First-tier cities in China include wealthy urban centers such as Shanghai, Beijing and Guangzhou, according to the National Bureau of Statistics. Provincial capitals are labeled second-tier cities.
MGPA is negotiating acquisitions of several retail properties in provincial capitals in China and office buildings in Japan, Saunders said.
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