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.
City: Hong Kong
Index ranking: 26th
- Restricted land supply
- Strong cultural scene
- Solid infrastructure to support growth
- 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.
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?
Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.