(Updating to show that REITs have fallen)
Concerns Loom for Hong Kong’s Future; REITs Fall (Update)
Hong Kong’s REITs and real estate stocks can still withstand the protests, but longer-term concerns loom
By Victor Yeung, Chief Investment Officer, Admiral Investment
June 2019 will go down in history as an important month in Hong Kong. Protests that originally targeted a bill seemed to have evolved into a general movement about Hong Kong’s political future. At the time of writing, the protests have lasted for more than a month, with multiple activities being called for each weekend up to a month in the future. Thus, we have received multiple investors enquiries about the investment sentiment of Hong Kong.
We think that the Hong Kong market can manage through the short-term volatility, as evidenced by the 2,000-point rise in the headline Hang Seng Index in June. Granted, part of the rise is attributed to the renewed trade negotiations between the U.S. and China. But the rise also indicates that the Hong Kong financial market is deep enough to absorb much more uncertainty than before, especially compared to two decades ago when the city was called a “single-layer copper-ware pot” because even small changes in external news flow would trigger a rise or fall.
There might have been some talks on transferring capital out of Hong Kong, but even the Monetary Authority of Singapore issued a statement to its banks specifically not to target this. Being a Hong Kong-headquartered firm, we have also received fresh reverse inquiries for real estate investment opportunities, showing at least some investors increasing their allocation to the city.
No End in Sight Anytime Soon
However, the protests are likely to continue for three main reasons.
First, for 79 days, the 2014 Umbrella Movement occupied Admiralty and Mong Kok, the former being Hong Kong’s political centre and the latter being Hong Kong’s commercial centre. In 2019, however, protesters have not mounted any long-term occupation, even if some protests had some road blocking (i.e. eventually being cleared in hours). This extends the stamina of the movement, as protesters go home every night and few commercial activities were disrupted for extended periods of time.
Second, the 2014 Umbrella Movement could be described as a youth movement, but the 2019 protests saw more actions from other age groups. Granted, the young generation is still at the forefront. A construction supply shop, for example, wrote in an article about a 13-year-old boy who bought a helmet with pocket money. But the older generation has also been more involved. In the Shatin protest on July 14, multiple video feeds showed older residents refusing police entry to their buildings.
Organisers Range from Mothers to Councillors
Third, the current protests have no visible leaders. In 2014, the Hong Kong Federation of Students (HKFS)—an alliance of the public universities’ student unions—was nominally the protest leader. This was why Carrie Lam, as the then Chief Secretary, organised a public meeting with the HKFS representatives. In 2019, while the million-people marches were organised by the Civil Human Rights Front—a protest organiser with a long history—many other protests were largely self-organised. These self-organised protests are happening every weekend in different districts.
We counted 15 separate protests from the first million-people march on June 9 to July 15, with organisers ranging from local district councillors to “a group of Hong Kong mothers.”
The lack of leaders means that the government does not have a negotiation counterpart. In fact, the university student unions rejected Carrie Lam’s request to meet, on the grounds that the 2019 protest is not a student protest and the student unions do not represent the protesters. The lack of leaders also means that the situation is particularly fluid.
Nonetheless, even though some protest scenes have been ugly, property damages have been minimal. Throughout the movement, there has been no record of looting or burning. For example, even though a protest broke out inside a large mall in Shatin on July 14, the shops were not hurt and most reopened the next day.
This is perhaps why the Hong Kong REITs and real estate stocks have traded in a stable range throughout the month. We see very little reason to change our Hong Kong allocation because of the movement.
The Future of Hong Kong
My longer-term concern is that the movement is weeks, if not months, from calming down. For two decades, any major political movements will go back to a simple but central question: How should the social contract between the government and the people look like in Hong Kong?
After the 1997 handover, Hong Kong was governed under the “one country, two systems” protocol for 50 years until 2047. In 2047, many of the readers of this magazine and I will be retired. But the 13-year-old boy who bought the construction helmet will only be 40 years old, and he will be in his professional prime then. He is, on top of the immediate triggers, trying to seek an exact clarification on the arrangements after 2047.
This is perhaps the real fuel that drove the movement into a second month and beyond. Tactics and random events could — at least in theory — change the sentiment rapidly, but the long-term investment merits of Hong Kong depend on when and how this clarification is reached.
About the author:
Victor Yeung is Admiral’s founding managing partner and chief investment officer, responsible for the firm’s overall strategy and day-to-day fund management. From 2007 to 2013, Yeung was with LaSalle Investment Management, where he managed the Asia Pacific portion of a US$10 billion Global Real Estate Securities programme. He also started the Asia Pacific Securities office for LaSalle Investment and became its managing director. He previously worked for Morgan Stanley and American Express. Yeung writes regular columns for various news media in Hong Kong, Singapore and Taiwan, and he is a co-host of a REIT commentary segment on Hong Kong’s Now TV. He has written one English and three Chinese books on REITs and other real estate topics.