27 February 2017 - Despite the Renminbi’s (RMB) inclusion in the IMF’s Special Drawing Rights basket last year and the strengthening of the yuan exchange rate against the US dollar in recent weeks, according to analysts at Nomura, the RMB is forecasted to experience further depreciation in 2017. Expected to depreciate by as much as 5 per cent,  this is largely a result of global political uncertainties, Fed/inflation policy risks brought on by the Trump administration, capital outflows from China as Chinese investors diversify into foreign assets and prevailing market sentiment that the RMB is overvalued. 

 

Looking to Chinese investment in the Hong Kong property market, a weaker rate for the RMB could function as a strong driver for capital outflows from the mainland into international markets with Hong Kong being a major beneficiary. With the Hong Kong Dollar pegged to the US currency, the RMB’s devaluation could ultimately lead to higher returns for Chinese investors buying property in the local market, offsetting the initial high cost of purchase. 

 

Since the onset of Chinese currency devaluation back in August 2015, property prices both in Hong Kong and tier-1 cities in mainland China reached record highs in 2016.  Moreover Chinese developers, keen to acquire residential land in Hong Kong, were responsible for the majority of land purchases in 2016 with notable sale tenders by the PRC-backed HNA Group amounting to HKD5.4 billion in Kai Tak.  Going forward, in reference to JLL’s projections, mainland developers will also account for up to 8 per cent of housing supply released between 2016 and 2019. 

 

That being said, taken in tandem with the introduction of higher levies part in parcel to the Hong Kong Government’s Stamp Duty and the tighter restriction on capital outflows for Chinese citizens, RMD depreciation could lead to a lapse in Mainland driven demand. Already the share of mainland buyers in luxury property have declined in due part because of the yuan’s depreciation relative to the greenback, now subject to a 30 per cent stamp duty as well, their demand could yet fall further. 

 

JLL however, offers a more sanguine assessment of Hong Kong’s residential property market. Buoyed by strong demand, especially on the side of first time buyers, the government stamp duty and the recent interest hikes will not necessarily lead to a strong market correction of residential prices. Cash rich Mainland Chinese buyers will continue to invest in Hong Kong in the long term, regardless of the RMB’s depreciation, particularly in the case of luxury properties which currently outperform mass residential units in terms of capital value.  With strong rental growth, a tight vacancy environment and real estate yields drawing steady returns, Hong Kong will remain an attractive destination for mainland buyers. Though residential prices may stabilize in the near term and drop 10-15 per cent, unless interest rates and mortgage lending rates increase significantly thus making the costs of borrowing prohibitive, the long-term price trajectory and investment from China in the Hong Kong real estate market will trend upwards.