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In focus: Why Hong Kong ranks 26th among global cities

Some regard Hong Kong as organised chaos. Hugo Machin explains why it takes 26th place in the Schroders Global Cities Index.

31/10/2016

Hugo Machin

Fund Manager, Global Cities

City: Hong Kong

Index ranking: 26th

Strengths

  • Restricted land supply
  • Strong cultural scene
  • Solid infrastructure to support growth

Weaknesses

  • Relationship with China needs clarifying
  • Economy needs to diversify away from finance

Why Hong Kong is a global city

Hong Kong makes the top 30 of our Global City Index, although its position at 26th reflects some of our concerns.

It has many of the ingredients that, in our view, make a city attractive to invest in.

We always emphasise the impact of a strong cultural scene in a global city, particularly to support inbound tourism which is a vital source of foreign exchange money.

In Hong Kong's case, it is famous for its iconic skyline and world famous food, but there are many other assets that make it a place people want to live and visit, including the Hong Kong Convention and Exhibition Centre, Disneyland, as well as beautiful parks and beaches.

It also has obvious geographical limits on urban sprawl, given the restricted land mass of Kowloon and Hong Kong Island. A limit to growth is another key requirement for an investor in global cities as any restrictions to building should support rents over the long term.

Finally, a global city needs decent infrastructure that can efficiently transport the residents and keep them connected to the globalised world. Hong Kong has the MTR rail, the new Kai Tak airport and the port.

But the city also faces challenges that need addressing if it is going to remain a vibrant hub for Asia.

Last week, I visited the ‘Pearl of the Orient’ to catch up with real estate companies and unfortunately came away less positive than on previous trips.

There are two questions that need to be asked about future prosperity: can Hong Kong work out the relationship with China; can it diversify its economy away from finance?

Political challenges in Hong Kong are increasing. After the handover from the UK to China in 1997, Hong Kong became a Special Administrative Region (SAR) under the elected chief executive. But Beijing introduced an electoral reform package in 2014-2015 that enables it to screen candidates for the role of chief executive, reducing the potency of universal elections.

Politics aside, we remain concerned that Hong Kong is becoming a one-trick pony. One of the key attributes of a global city is a diverse economy, where building owners are not reliant on the success of one sector to sustain rent levels. Hong Kong is heavily dependant on the finance sector to occupy buildings and provide jobs. Unfortunately, it is not creating new jobs in a meaningful way and we are concerned about demand.

Hong Kong, most notably, has not been able to attract digital industries. Even the behemoth ‘FANG’ companies (Facebook, Amazon, Netflix and Google) have very little presence. Facebook took 11,000 sq ft in Quarry Bay in 2014. For a company worth $370bn, this does not signal Hong Kong is a key hub. It's hard to pinpoint why this is. One reason, perversely, could be the lack of space, with these businesses often looking for large and adaptable sites.

Neighbouring Shenzen, in contrast, seems to be taking market share with the giant Nanshan Hi-Tech Park now home to Huawei, Tencent and ZTE. This casts a shadow over how competitive Hong Kong will remain.

An overview of Hong Kong real estate

The market is focused on office, retail and residential with few industrial sites.
The office sector seems to be tracking sideways; vacancy levels are at 1.5%, according to the agent JLL.

Retail has faced problems since 2014 when a strong boom in visitors from mainland Chinese was brought to an abrupt end by a crackdown from the Chinese authorities. Trips to the shopping malls of Hong Kong and the casinos of nearby Macau were closely monitored as evidence of spending ill-gotten gains. This coincided with a weakening currency, reducing the purchasing power of visiting mainlanders.

Retailers, particularly in the luxury segment, had become used to queues of customers. The challenge for mall owners is to reduce reliance on luxury outlets and provide a broader offering, with strong evidence this is beginning to happen.

On a positive note, the residential market is back to full strength with new projects selling quickly. Chinese buyers, concerned that an economic slowdown would hit their own currency, the renminbi, see homes priced in Hong Kong dollars as a safer bet. This is one of the factors supporting the market.

Conclusion

From its origins as a simple shipping village on the South China Sea to the bustling metropolis of today, Hong Kong remains a vibrant Asian centre. But we have concerns about its long-term competitiveness, based on all the issues we have explained here. With all great global cities, reinvention is the key. Will Hong Kong reinvent itself?

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