Mild Impact From Interest Rate Hikes

HK Commercial Property Market To See Mild Impact From Interest Rate Hikes

HONG KONG – The expected interest hike of the US Federal Reserve and the Hong Kong Monetary Authority (HKMA) this year could have marginal effect on the Chinese territory’s commercial property market, according to an opinion piece by Colliers that was published on the South China Morning Post (SCMP) on Tuesday noon (12 April, SGT).

Hannah Jeong, Head of valuation & advisory services at Colliers in Hong Kong, said even if HKMA decides to raise interest rates by the same amount as the Fed for the rest of the year, it will likely only have a soft impact on risk to local commercial property investors.

“First, we expect the HKMA to move slower in increasing rates to minimise any negative economic impact. Second, too much capital is chasing the limited supply of quality assets in Hong Kong. A large number of funds have raised new money in 2022, all eager to find good opportunities in the market. This competition will counterbalance the potential cap rate expansion.”

“Third, geopolitical tensions might boost the inflation rate faster than the interest rate. This is highly likely to keep Hong Kong in negative interest rate territory, where the interest rate is below the inflation rate. While the COVID-19 pandemic continues to create uncertainty and likely to slow investment decision-making, negative real interest rate conditions will offer a good buffer to investors,” she explained.

Notably, commercial property investors in Hong Kong closely monitor any Fed pronouncements on the movement of interest rates, as they are keenly aware of how it could affect their borrowing costs and investment returns.

In March, the US Federal Reserve raised interest rates by a quarter point and hinted it could increase it 6 more times, up to a total of 100 basis points (bps) before the end of the year, as it attempts to fulfil its objective of increasing employment and maintaining America’s annual inflation rate to around 2 percent.

While HKMA hiked in lockstep, raising its base rate by 25 bps to 0.75 percent to maintain financial and monetary stability, it does not necessarily follow that local lenders will match the pace and frequency of future US rate hikes.

Hong Kong’s base rate moves according to a preset formula: either 50 bps above the lower end of the present target range for the US federal funds rate (currently 0.25 percent to 0.5 percent), or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBOR), whichever is higher.

Usually, a US rate increase would cause anxiety for local commercial property investors as it can potentially increase borrowing costs. However, the HKMA stated that HIBOR does not increase automatically when the US Fed rate does, and that local banks will make their own decisions based on supply and demand.

“With mild pressure from the interest-rate hike, commercial real estate investors can take solace from evidence that the direct link between higher interest rates and lower investment values in Hong Kong is not as established as one might assume. As long as investors are not highly leveraged financially, the expected interest rate hikes will not put immediate pressure on the market,” Jeong added.

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