Hong Kong struggles to keep its appeal as China’s influence grows

Hong Kong’s status as a hub for monied expatriates has been endangered by a range of factors and the luxury rental sector is suffering

In 2017, CNN Travel published a widely read article detailing “40 reasons why Hong Kong is the world’s greatest city.”

The listicle, which coincided with the 20th anniversary of the handover from British to Chinese rule, was largely irreverent.

It referenced local superstar Maggie Cheung, the solid gold lavatory in a bling jewelers’ restroom, and “wholesome late nights” in Wanchai, capturing the city’s essence — its colour, chaos, and charm.

But it also highlighted the myriad reasons why Hong Kong was once considered one of the world’s most liveable cities due to the lowest tax rates in Asia, a diverse culinary culture, state-of-the-art public transport, and swathes of green open space.

Fast forward four years and most of these factors remain. Yet the ‘world’s greatest city’ narrative has been overshadowed — in the minds of international observers anyway — by China’s increasing influence over the territory.

Business confidence had already been shaken by the violent extradition bill protests in 2019 before Beijing last year introduced a wide-ranging security law to curb protests and further reduce the autonomy of Hong Kong.

And then there are Hong Kong’s stringent measures to contain the ongoing global pandemic. Residents have been effectively grounded by travel bans and one of the world’s longest quarantines.

Pressure on the Hong Kong government to roll back restrictions is mounting. In August, Frederik Gollob, chairman of the city’s European Chamber of Commerce, wrote an open letter to Hong Kong Chief Executive Carrie Lam, saying the territory must “open itself sooner rather than later”.

“This new quarantine regime could lead many in the international community to question if they want to remain indefinitely trapped in Hong Kong when the rest of the world is moving on,” according to Gollob, who represents more than a dozen foreign chambers in the city.

The American Chamber of Commerce, meanwhile, released a survey report in May stating that 42 percent of respondents are considering or planning on moving out. Figures from the territory’s census and statistics department show that its population declined by almost 90,000, or 1.2 percent, in the 12 months from July 2020, the largest drop since records began in 1961.

Given that foreign residents accounted for about 10 percent of the population before the pandemic, a large-scale departure could potentially impact the high-end residential rental market. According to Max Siu, a research analyst at consultancy JLL Hong Kong, luxury rents dropped by more than 13 percent between the start of 2020 and the first quarter of 2021.

“Foreign professionals used to be the main source of leasing demand for luxury housing,” he says. “Their departure and the limited arrivals due to the restrictions have inevitably harmed the high-end rental market.”

Siu adds however that luxury residential rents increased 1.4 percent between April and June 2021, the first quarterly rise since Q3 2019. “The market was primarily supported by the current pool of residents in Hong Kong, which offset the significant drop in expatriate arrivals,” he says.

The uptick was in part attributed to ongoing work-from-home arrangements, which led some tenants to seek out larger-sized units. For others, a reduction in housing budgets prompted existing expatriates to relocate from premium neighbourhoods like the Peak to the Mid-Levels or even farther away to the New Territories, resulting in stronger demand for high-end rental units in these districts.

A recent JLL report notes that the Mid-Levels experienced the highest rental growth, 2 percent, among the major submarkets, largely on the back of limited availability.

Other analysts believe that the departure of foreign professionals is more likely to affect the mid-scale market rather than the luxury segment. According to Vincent Cheung, managing director of local real estate consultancy Vincorn Group, most apartments more than 1,000sq ft in premium locations are currently available for HKD80,000-100,000 (USD10,300-USD13,000) a month. And this correlates with the average housing allowance provided to foreign senior executives in the banking and IT sectors.

“Still, there aren’t many expats in Hong Kong on such a package right now,” he explains. “The majority of foreign professionals currently here are most likely teachers who are earning at least half that amount.

“What’s more, the numbers of Chinese from the mainland relocating to Hong Kong to work in the financial and IT sectors are increasing by the day.”

There are clear indications that mainland firms are eyeing Hong Kong in the wake of the international community’s uncertainties and China’s increasing influence within the territory. A recent survey, jointly conducted by InvestHK, an investment-promoting department of the HKSAR government, and the Census and Statistics Department, revealed that the number of business operations in Hong Kong with parent companies overseas and in the Chinese mainland increased 10 percent from 8,225 in 2017 to 9,049 in 2021. Mainland companies now account for almost 23 percent of these operations.

Real estate consultancy Colliers, meanwhile, published a report in September stating that mainland companies are likely to require an additional 4 million sq ft of office space in Hong Kong by 2025. And this steady influx across the Shenzhen River is already influencing the luxury rental market.

“During the last couple of years, we’ve started to see some eye-popping transactions recorded in the top-end segment for both investment and leasing market, many of which are senior management from Chinese corporates who are considered the ‘new locals’ of Hong Kong,” Siu says. “We believe that this trend will become more apparent as more mainland Chinese firms set up in Hong Kong.”

There’s little indication of when Hong Kong will fully reopen its borders to the rest of the world. Therefore, the extent to which the fallout of recent years impacts its haven status within the international business community — and the implications this has for the luxury rental market — remains to be seen.

It will be interesting to see whether major western media outlets are quite as keen to champion Hong Kong as the “world’s greatest city” when the territory celebrates 25 years since casting off the British yoke in 2022.

The original version of this article appeared in Issue No. 169 of PropertyGuru Property Report Magazine.
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