Q&A: Can anything stop the flurry of capital out of Hong Kong?

Oliver Watt, director in the cross-border investment team, Savills The question over whether anything can curb outbound flows of capital from Hong Kong investors into global real estate is difficult to answer as there are so many factors that come into play. But there are a handful of scenarios that could potentially impact outbound flows. First among these would be some form of major political change, similar to that seen in mainland China in 2017, which resulted in outbound flows being restricted. If a comparable restriction was imposed on Hong Kong-based investors, this would possibly have the biggest impact on outbound flows. However, there is absolutely no indication that this sort of measure is on the horizon. Hong Kong’s real estate assets are in such high demand that the government is focused on cooling measures and curbing inbound investment, rather than attempting to restrict outbound flows.” These types of measures come in to force when domestic markets are suffering and there is a desire from the relevant government to take measures to keep capital on-shore to try to bolster the economy and asset prices. Hong Kong suffers from the opposite problem: real estate assets are in such high demand that the government is more focused on cooling measures and curbing inbound investment, rather than those attempting to restrict outbound flows. Another possible scenario is if something were to happen in the Hong Kong property market; for example, a major pricing correction. This would result in some investors turning away from the international markets to take advantage of the reduced domestic prices. But it would not affect all investors. For many the decision to invest overseas is driven by a desire to diversify their wealth, not simply price speculation. If this were to happen then any slowdown would be temporary until values began to rise again. A third scenario would be China’s capital control measures affecting the Hong Kong-based subsidiaries of Chinese companies. This scenario is starting to become more real. Over the coming months we will see the true effects of these increased restrictions and which groups are caught by them. It will undoubtedly affect some of the groups that have been prevalent in the global markets, but by no means will it affect the majority of the Hong Kong groups that we are working with.  Over the coming months we will see the true effects of these increased restrictions and which groups are caught by them. It will undoubtedly affect some of the groups that have been prevalent in the global markets.” There has been much made of Hong Kong investors being eager to take advantage of the currency arbitrage in the UK in the period since June 2016. There is some truth to this, but in our view, this really drives the prices that investors are willing to pay, it is not the sole reason that drives any investor to invest or not. As such, while sterling has recently begun to rise once more, we do not see this causing a major slowdown in outbound investment. Lastly, global interest rate rises could also influence capital flows. While we cannot be sure if, and by how much, interest rates will rise again in the UK (although most commentators are forecasting an initial 25 basis point rise in May), the likelihood of the Federal Reserve in the US raising interest rates three times over the course of 2018 is now more than 50%. Any rate increases diminish the attractive low-interest environment overseas investors have grown used to operating in. Until now, the low cost of debt has allowed investors to borrow cheaply and maximise their return on investment. As soon as the positive carry between property yields and borrowing costs disappears in any market this would impact investor sentiment, although again it is unlikely to curtail it completely The reality is that there are a huge number of Hong Kong investors that are keen to diversify their assets. The biggest change we are therefore most likely to see will be in where they choose to focus their attention. The outbound programme of investment is likely to continue for a while yet.