You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. The world's leading real estate markets have been testing the stamina of even the most experienced investors.
Rising interest rates, too much debt, and eye popping price wings have shaken up commercial and residential real estate from China to Europe, to the US and beyond.
Here in Hong Kong, rates have put a chill on home sales and prices, with some mortgages sleeping underwater, and commercial real estate still struggles with pandemic effects and geopolitical threats.
Is the real estate route almost over for global cities? What will a recovery look like? And what are the long term risks and opportunities. Let's bring in someone who knows real estate as well as anyone. Peter church House, a veteran property consultant at port Wood Capital.
And Patrick Wong, senior property analyst with Bloomberg Intelligence.
Peter and Patrick, it's great to have you.
Thank you, thanks very much, lovely to be back.
Hi, Peter. Central Banks around the world have been hiking interest rates in an unprecedented pace. The Fed in particular has hike winterest rates by almost five hundred basis points in two years. Global housing prices have started to fall in your forty year experience. How serious is this housing downturn compared to other cycles.
Well, to be honest, think about it, the global real estate market has been fairly homogeneous if you look at it. Over the last decade since the global financial crisis, central banks around the world cut interest rates pretty much universally
to very low levels and for many countries record low levels. Now, that created obviously very good conditions for real estate generally around the world, and we did see prices picking up in most countries around the world residential, commercial, even retail and so on. And of course what didn't happen during that period is we didn't really see a major construction boom.
Most times in the past when we've seen low interest rates like that, we've seen a massive increase in construction, which has led ultimately to a massive oversupply of real estate in various forms. This cycle has been quite different. So as we're going into a slow down as interest rates rise, we are not seeing around the world, massive problems with excess supply in certain cities, yes, like San Francisco in the commercial market, but certainly not in the
residential markets around the world. So that I think has been a very positive outcome of this last decade, and that in one sense, will suggest that we may not see a massive crash in real estate prices as we've seen in other cycles.
Economists and analysts, we're talking about a fixed rate mortgage cliff where homeowners would see their mortgage payments balloon after their role their fixed rate or honeymoon rates, but this never really happened. What's your view.
Well, in the US, of course, fixed rate mortgages run for twenty to thirty years, so if you've taken on a mortgage in the last five years, you're not going to fall off any cliff anytime soon unless you sell your property and then get another mortgage. You will buy another property and then you're going to be paying the
higher mortgage. What we see in other Western countries is that a lot of people do take out three to five year fixed rate mortgages, and those are going to be starting to reseet in the coming year or so, one guesses. But having said that it's unlikely that we're going to see a major series of defaults in the residential market, largely because for several reasons so far at least, is that unemployment is still very low. People have all
got jobs. Secondly, in many countries, they don't have a lot of other debt, maybe with the exception of the US, where there's a lot of credit card debt, education debt, university debt, and so on. And again you couple that with the thought that for most central banks like the FED and the Bank of England and the Eurozone, interest rates probably have pretty much peaked or maybe have a
little way to run. But we're not going to see the interest rates that we saw in the early eighties under the Volkar regime, where we went to sixteen seventeen eighteen percent from six or seven percent. So I think the interest rate cycle isn't going to be as debilitating as it has been in the past.
Peter church House, you just struck a rather optimistic or an upbeat sounding tone. We talked about interest rates, you mentioned those in the nineteen seventies. We do have an entire generation of investors today who've never seen interest rates as high as they are, or at least rise as quickly as they have. They've never seen this somewhat unique set of conditions. You must talk with younger investors when they come up to you and ask you about it.
Do you tell them what this tool shall pass this time? It's different or not different?
Well, every time is different, which is always we have to learn from We have to learn from history also. So I get asked the question a huge number of times from people of all ages and occupations and stripes. I'm looking at buying a property, of buying my first house or buying another house, What should I do? Well, that's always a very difficult question because you don't know
the personal situation of each person. But what I do say to people often, particularly in Hong Kong, where the property market is usually very tight and it's very hard often to find the property that you want. And if it means that you can afford to put down the deposit and you can afford to pay the coupon the interest rate, then probably you should take the plunge. If you're looking at a long term situation where you and
your family want to live in your own home. If you're looking at an investment to buy a property for a quick flip, or to invest for a few years and sell on and make a profit. That's a different question.
Peter church House point well taken. Patrick Wong with Bloomberg Intelligence your team wrote recently about Hong Kong's negative equity mortgages. In more popular parlance, they're known as underwater mortgages where the amount, oh the balance is actually higher than what the property is worth. We've seen the pace pick up in Hong Kong that was a big issue in the United States back during the two thousand and seven two thousand and eight crisis. Talk about underwater mortgages in Hong Kong.
Are they really that unusual and is it really that big a problem?
Yeah, I think that is an interesting point to look at because for the past decade in Hong Kong, we also see the situation that the mortgage is basically the long term watery, so it's pretty low right, So basically we have the lots of mortgages. They're really willing to like having more home mortgage and larry. It's also come to an interesting point that the interest way is going up. At the same time we see the government also doing quite a lot of morgage easing over the past couple
of years. And the challenge I think we could see is that if the situation like that, like we have lots of ninety percent five percent cover mortgage room there and we also have the price coming down almost twenty percent from the peak, right, we could see that cover leged mortgage, it could happen further. But having said that, in Hong Kong the current situation, we also find lots of the homeowners they still can pay the basically the
mortgage payment every month. Although if it's true that we see the mortgage payment every monthday paying, it's getting high and high with the mortgage rate heights. So if the economy is still doing okay at this point and employmary is so low, that's fine, but we all be taken to our canda. Certain k could happen over two or two four.
Yeah, Patrick, I think you've described that pretty well. Just to put some numbers around that, if you think about Hong Kong at the moment, we have something like one point three five million homeowners in Hong Kong. At the moment, eleven thousand, one hundred of those homeowners are underwater on their mortgage. That's less than one percent is about point eight of one percent, which is a very very low. Indeed, if we think back in history the bottom of the market.
In two thousand and three, we had over one hundred and ten thousand households underwater. But what was the percentage of non performing loans? People didn't stop paying their mortgages. The percentage of non paying mortgages was about one point two or one point four percent, a very very tiny proportion. So Hong Kong people typically, even if the underwater, continue
to pay the mortgage. In many other parts of the world, particularly in the US and so on, people just hand the keys back to the bank and say it's yours, buddy, I'm leaving. But people in Hong Kong don't do that. And so I'm reasonably encouraged by Hong Kong consumer behavior in that sense. And also, I very strongly doubt whether we're going to see one hundred thousand people underwater in
their mortgages. Given that the average loan to value ratio in Hong Kong is about fifty five percent and about sixty percent of homeowners don't even have a mortgage.
What do you think explain to that? Peter church House that people still pay their mortgages, that the non performing mortgage ratio stays law are much lower than in the United States, as we've seen.
To what do you attribute that well, I think people in Hong Kong have grown up with huge volatility in the past. If we go back to the early eighties, when I arrived here in nineteen eighty, residential property prices went up by between one hundred and one hundred and twenty five percent per annum for three years.
That's remarkable, that's huge. That makes it one of the most volatile residential real estate markets in the world, doesn't.
It Absolutely correct? And at that time I estimated that only about four or five percent of households could realistically afford to service a mortgage, And of course the inevitable happened. We saw a crash of mega proportions in the real estate market. It went down by seventy odd percent between early nineteen eighty one and the middle of nineteen eighty four over that three year period, and a lot of
people were wiped out. So as a result of that, Hong Kong people, I think have learned not to take on too much debt, both at the household level and at the corporate level. So that's why you see people here quite resistant to loading themselves up with debt, whereas households in Australia, New Zealand, England US load themselves up with debt like crazy.
Peter, there seems to be a shortage of rental properties around the world, despite the fact that home prices seem to be falling. How do we get into this situation?
Yeah, that's an amazing question because when we started seeing rising interest rates, I didn't expect to see rents in major cities around the world rising, which is exactly what's happening. And I think there are several explanations for that. Firstly, affordability in major cities is not great, so people are renting, not buying. Unemployment is relatively low, so people have all got jobs, and a lot of those jobs are still
in major cities. And there has not been a major construction boom in these cities, so there isn't a lot of excess supply around. So it's very fascinating to see that if you look around the world, even in Hong Kong. Now we've seen the last six months rents have picked up, prices have gone down, but rents have picked up. If you go to Sydney, Melbourne, Auckland, London, most of the major cities in the UK, France, Paris, major cities in the US, rents edging up, which is against the trend
of prices. So what that's telling us is that yields on investment properties are rising, and that of course reflects the rise and interest rates. Well, people expect to get a higher yield. It's actually not a bad situation. So again it reduces the risk of systemic risk in the financial system because of this.
Yeah, I agree with Peter says that the rental market is p is drawn in Hong Kong. Right, of course, arts as Hong Kong is also in other major city
like Sydney or even before like Singapore. And then for Hong Kong, I think the good thing is that we look at the lumbers is already up almost like five to ten percent this year, and potentially we think that another five percent could happen in two to four And the challenge I think in the past is that we they have some properties and our fall for Hong Kong. But the things turned around and we see the government also willing to attract more talents to come to Hong
Kong late first line months this year. We already have one hundred thousand of the new talents they get the visa and then coming to Hong Kong. Of course, lots of them from England Chinla, but we also see that potentially we could see that we have more and more coming, then we'll support the leasing market for the housing.
So Patrick, in terms of Hong Kong housing prices, what's your forecast for next year? Are they still going to go down or do you see a recovery.
One interesting question we just mentioned about the rants is going up right, which is really good. But on the other hand, I think there's also some potential with about the mortgageway going up again. I think recently in September we have HBC leading other bands to raise the mortgageway
by fifty bases points. So that's something that when US didn't move up anything, so we also become more cautious if Hong Kong could also raise the mortgage way further right where we see the high ball Atturney's almost five sand and then we also see Portanzoly Toso Bonnu is also like four point five to five percent something like that, so you can also check it. The mortgageway could increase further.
And for us, if we think the home prices we've been falling about five to ten percent next year, so this is under the bad job that with the mortgageway could also slightly increase and then off the rental you is still pretty low at this point, but hopefully the rants cranning up a bit at least one UMSTA can get more rants.
Yeah.
On the other side of that as well, on the supply side, Patrick, is quite important is that the forecast supply of new housing coming under the market is not huge, but it's increasing, it's not going down, so that's a factor as well. And you might also notice that the inventory of unsold property held by the property developers is the highest it's been for many years. So there's gonna be a little bit of pressure perhaps from the developers
to maybe cut prices to get rid of inventory. Again, it's not massive, but it's a downward pressure, not an upward one.
Yeah. True, it's quite different from the situation on you in Lane Light and I believe right, Peter, oh very much so.
Our guests on Asia Centric are Peter church House of port Wood Capital and Patrick Wong, senior property analyst with Bloomberg Intelligence. Gentlemen, what will it take to pull Hong Kong out of its residential property price slump? Is it just a matter of interest rates coming back down? And what do you think a recovery will look like?
Well? Maybe if I jump in first. Quite frankly, the broader economy is hugely important for Hong Kong. As we know, last year the economy contracted by three three and a half percent. That clearly is one of the worst contractions you would normally expect to see in any economy. But we didn't see it complete crash in the property market, even with interest rates rising, so unemployment is still relatively low. What we are going to see, I think a very big positive for Hong Kong will be what goes on
in the Greater Bay Area to our north. We keep hearing endless stories of massive investment being pushed into the Greater Bay Area for technology, creating a huge technology hub, AI hub, med tech, robotics, whatever you want to name it. It's going to happen there, and Hong Kong will inevitably, I think, continue to play a role as a conduit
of skilled capital and so on to that growth node. Also, we're going to see I suspect a growing need for asset management for Chinese assets in the North, and Hong Kong will likely set itself up as a place where those assets can be managed, both in wealth management, institutional asset management and also in things like insurance services. That will provide a fillip to high end job growth, I think, which will have an impact and a follow on impact into the residential market.
Yeah. I also agree with that, and interestingly, I think apart from the mortgageway or interest way increased recently, another point I want to say is about the situation we have Hong Kong become more mainland slication that is the terms that we use in the latest for Hong Kong Singapore, and that is really interesting one because I would say that for Hong Kong, we also see more and more
mainland talents coming to Hong Kong. So that is also important to support over economy, and not just about the housing market the ranks, but also about support them. Like the workflow here, the workforce is very important and like concerstion setup for example, we need more and more workers and unfortunately in Hong Kong. In the past, the population also cover stabilized at some point or even coming time
a little bit. So this time I think we have more population info drive the market Tolmow, and then then it's also impottern to drive to a back to a more healthy level.
Yeah.
Adding to that, I think the one thing that has always concerned me in Hong Kong is that affordability for housing is very bad. It's one of the worst in the world. Pretty much anybody knows that, and that really is a result of government policy. And that policy is basically to drip feed land onto the market at a rate which almost guarantees that land praces remain relatively high, which means that in the end product also remains relatively high.
So we end up within a very difficult affordability situation in Hong Kong, to the extent that something like forty five or fifty percent of the population cannot afford to own their own home.
Peter, there's another segment of the property market that seems to be really suffering, and that's obviously office. We just had we work far for bankruptcy. What's your view there in terms of the Hong Kong commercial space.
Yeah, the commercial market definitely seems a little on the soft side, and it's really started as a product of COVID and even pre COVID. Really historically, the office market in Hong Kong has maintained vacancy rates of under five percent, some of the lowest in the world. They are now running at about thirteen percent, which I think is the highest I can remember. In the time that I've been here, We've seen office rentals correct by about thirty thirty one
percent over the last two and a half to three years. So, yeah, we've got an oversupply situation in the office market, and if we look the next couple of years, we're going to see an increase in production or completions of office space, So that tends to actually make the situation a little worse. The next two or three years, we're going to see supply pick up to north of two million square feet at a time when we've already got record high vacancy rates.
So that suggests unless we get a massive surge in the economy and a massive surge of inflow of service workers, then we're going to see vacancy rates continue pretty high and see a continuation of soft rints certainly over the next one to two years.
Yeah, I think. Then the other point I want to make here is about the occupancy of the little buildings, because we also find that the occupancy going up a little bit just for those little buildings, it's not as
quick as before like in the past. I think back to like five years ago when Swie Properties have the one typo pace in Corey Bay competer it's all one hundred percent p lease earlier before the competition, but now for two typo paces project also another one million square feet project, but the occupancy rate is still less than sixty percent after he competed for quite a bit of months. Then we also see the Henderson in Central it's also
just approaching fifty percent. Please, But of course it's really good when we see the over occupancy way it is
less than ninety percent for the whole Hong Kong. So it's something that ever we see before that heap situation, and I guess it's also a cover a bit of cyclical for the inchest way going up possibly a reason and then also the structural reason we've like the pandemic after that is the return to office from home policy that how changes it also makes lots of banks they also think about using the hot dass and then also
cutting down the space a bit. We also see the copic demands not as strong as before, so that's another problem.
Yeah, I think also you could add to that list, which is a pretty long list, I have to say, you could add to geopolitics. China is not flavor of the months these days with the Western businesses. The propensity to invest in Hong Kong, invest in China by foreign companies has dropped off markedly. We've seen one hundred and twenty thousand people flow out of Hong Kong twenty twenty
two twenty one. We've seen significant numbers of companies relocate central portions or perhaps all of their offices to other locations, particularly to Singapore. So the geopolitical situation is having a bit of a negative impact on the market. But again my sort of suggestion is that that's going to be filled up by rapid investment in the Greater Bay area over the course of the next two or three years.
So that I think is going to fill up a lot of the gap that's been left by foreign companies and foreign investors who have left Hong Kong.
So if you're a Hong Kong developer, what can you do if you're building something new with a load demand.
Well, I think what a lot of people are looking at, and this is certainly the example we're seeing in places like London and big cities in the US is that people are building better and better quality commercial buildings that have high ESG, Environmental Social Governance Standards LEED standards and so on, because a lot of tenants, a lot of relocate or locate in buildings with high environmental standards, so they can then claim credits to their ESG score in
this global push for decarbonization and so on. Look at London as an example. You can see in London very distinct differences and occupancy rates between high environmental quality buildings and those right next to them which are much lower quality. Not just the occupancy levels, but the average rents. The rental differential can be as much as thirty to forty forty five percent difference between the high quality versus the average to low quality buildings.
So, Peter, in terms of investments, what are you looking at right now?
Well, if you're looking at property stocks around the world, property stocks are not flavor of the month by any means, and that's very largely the macro conditions, not necessarily the local micro conditions, but really the macro ie rising interest rates can consered by investors as being negative for real estate full stop. That of course isn't always the case
and is not necessary the case. But what we're seeing now is around the world is that listed property companies are trading at deep discounts to their underlying asset value and very often at very low price earnings ratios and with particularly high dividend yields. And Hong Kong is an
absolute classic case and point. The big large property companies in Hong Kong, great world class companies, some of the best in the world, are trading at anything in the region of fifty to sixty five percent discount to their underlying net asset value. That means you are buying effectively if you look at it, you are buying a Grade A office building which worth one hundred million, you are
buying it for fifty million or less. That's effectively what you're doing when you're looking at Hong Kong property stocks. And these are not shonky low class companies. These are well managed, well capitalized companies with great quality asset.
Peter, before you go, I have to ask you've been a successful analyst and investor for over forty years. You were a storied analyst at Morgan Stanley in Hong Kong, and then you invested your own money. Is there any investment that you made that you're particularly proud of that you'd like to share with us.
Oh? Well, I've made some that I've been a particular disasters as well, but luckily I never invest so much that I can't afford to lose.
It's good advice.
I won't tell you the disaster ones, but there's been a two or three. But by and large it's all about cycles. For example, I bought my first property in Hong Kong in nineteen eighty four when the property market was down something like seventy percent, and I thought, my goodness,
it can't really go down much more than this. So I bought my first property and luckily in those days you could get a ninety percent mortgage, and so it really wasn't a lot of money, and that was certainly money I could ford to lose if at winter zero. But of course it's gone up hundreds and hundreds and hundreds of percent since that time, So really that was picking the cycle again. Many people bought the cycle in two thousand and three at the end of SARS. SARS
was the nail in the property coffin. It really was the end of a down cycle that actually saw prices down sixty odd percent and a lot of people, a lot of friends of mine and companies on you. I set up a hedge fund soon after that to capitalize on that low point in the markets. So if you pick the timing, you very rarely do you ever get
the timing absolutely perfect. But as long as you get it pretty close to the bottom, either on the way down or the way up, or sell pretty close to the top and the way up or the way down, you'll probably do very well. And finally, if you look at it really realistically, around the world, and no matter which market you look at, residential property has beaten inflation over thirty to fifty year time periods by anything up
to four or five percent compound per anim. Hong Kong it's about four percent per anim over forty five years, and Britain I think it's about three percent per an over thirty five forty years. So property tends to be beaten inflation over the long term.
Our guests have been Peter church House, a man of many talents, investors consultant, world traveler, and Patrick Wong, our very own senior property analyst at Bloomberg Intelligence. It has been an incisive and engaging glimpse into the world of residential and commercial property and investing here in Hong Kong, in the US and around the world. Gentlemen, it's been our pleasure, Thank you very much.
Tom John thoroughly enjoyed being here and hope we can meet up again soon at some point.
Yeah, definitely, it's quick to have pita.
Thank you. I'm Tom Corbett in Hong Kong.
And I'm John Lee. This podcast was edited by Clara Chan and you've been listening to the Asia Centric podcast