The new Hong Kong government that took office in July has already tried to cool the red hot local property market but to no avail. Friday’s announcement though was noted for its severity. The BSD is targeting foreign buyers, the majority of whom come from mainland China. Yet the issue with this latest measure is that it does not solve the issue of cheap money that has come about from ultra-low interest rates in the US and demand that far outstrips supply.
The new measure is set to hit volumes hardest and, as a result, we may see 5-10% declines in prices in the physical market. Although developers’ share prices came under pressure following the announcement we don’t see any major corrections as they now hold significantly less than half of their net asset values (NAVs) in residential property. The immediate impact, therefore, will most likely be a widening of the NAV discounts on their share prices, as a less liquid physical market will justify.
We maintain our view that over the long-term, with the Hong Kong dollar pegged to the US dollar, interest rate policy in the US will remain the biggest risk factor for the Hong Kong housing market. Indeed, this new tax is evidence of the cost of maintaining the peg. We remain committed to our focus on lower beta names in Hong Kong and particularly investment property companies, which have minimal residential exposure. Our exposure to other names with strong commercial portfolios and supportive yields means we are ideally placed to weather any headwinds arising from these measures.