Mainland China property companies pull back in Hong Kong

Mainland Chinese property companies are scaling back their presence in Hong Kong as they struggle to survive a liquidity crisis that has rocked the sector and forced the world’s most indebted developer Evergrande to default.

Cash-strapped property company Kaisa, the Chinese sector’s second-biggest offshore bond issuer behind Evergrande, sold an entire floor at The Centre, a prime office tower in Hong Kong’s central district in December.

Property agents said China Aoyuan, a developer based in the southern Chinese city of Guangzhou, has tried to sell a 117,000 sq ft office building in Hong Kong’s Kowloon district that it had been hoping to redevelop.

Land sales, which account for a large proportion of Hong Kong’s tax receipts, have also been affected. None of the tendered sites in the government’s land sale programme this year and last year were awarded to mainland developers. In 2020, at least eight of the 15 tendered sites were awarded to mainland-linked companies.

“Less demand is expected from mainland developers at least within 2022 and 2023,” said Hannah Jeong of property agency Colliers in Hong Kong.

Mainland developer Evergrande defaulted on its overseas bonds in December amid a liquidity crisis that has spread across China’s vast real estate sector.

While mainland property companies scale back in Hong Kong, analysts said the territory was also suffering lower demand for premium office space from a wide range of mainland tenants.

Savills said demand from mainland companies for premium office space had been hurt by China’s anti-coronavirus closure of the border with Hong Kong and by President Xi Jinping’s crackdown on opulent displays of wealth as well as the wider impact of the mainland property sector’s problems.

Analysts forecast rents in Hong Kong’s premium office space will drop by at least 5 per cent this year.

The softer outlook is expected to hurt the fortunes of Hong Kong’s main real estate developers, including Jardine Matheson, one of the territory’s oldest and largest business empires, and Hong Kong-listed property conglomerate Great Eagle Holdings.

“Mainland firms have made up a lot of demand. Therefore, the weakened demand . . . is expected to put pressure on [rental prices in] the Central district,” Jeong said.

Mainland Chinese companies take up more than one-fifth of office space in many buildings located in the city’s business district, Colliers data showed. But eight out of ten prime office buildings have experienced a drop in the proportion of their tenants that come from the mainland since the start of the coronavirus pandemic.

The proportion of mainland tenants at Exchange Square One and Two located in Central, owned by Jardine Matheson’s Hongkong Land, fell from about 27 and 15 per cent in 2019 to 23 and 11 per cent respectively in 2021. In ICBC Tower, also situated in Central and owned by Hong Kong-based Great Eagle’s Champion Reit, the proportion fell from 2019’s 46 per cent to 39 per cent in 2021.

Apart from slower demand from mainland firms, property agents also pointed to the impact on rents of multinational companies relocating staff elsewhere in the region to avoid Hong Kong’s stringent Covid-19 policies.

In contrast, prime office rents in Singapore are forecast to grow up to 10 per cent by the end of 2022. JLL Singapore’s latest figures show prime office rental prices in the city-state have already seen a quarterly growth of over 2 per cent so far this year.

Tay Huey Ying, JLL Singapore’s head of research and consultancy, said an increase of companies from Hong Kong relocating headcounts to Singapore “could gather pace on the back of Singapore’s growing appeal as a business hub”.

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