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Real estate capital markets in Hong Kong and China offer plentiful opportunities, especially in the sphere of sustainable investment and finance.
Both global and regional investors in Asia Pacific are beginning to factor sustainability into valuations and investment decisions, buoyed by the huge amounts of capital available for sustainable finance. Even in 2022, a difficult year for China, $150 billion of green bonds were issued.
The ULI Hong Kong Conference 2023 stage featured a plethora of capital market heavyweights, from pensions companies and private equity investors to listed property companies and banks.
A panel of international investors discussed Hong Kong’s place in the investment universe, both as a place to invest and as a place for investment businesses to be located in the wake of protests, covid and political tensions. The city’s unrivalled geographical place: part of China but also close to the major market of Korea and Japan, continue to make it a good place to be located, as does its talent pool and legal system, speakers at the event said.
They also pointed out that Hong Kong’s dollar peg is an important stabilizing factor for international investors, who tended to be dollar denominated. Currency losses or the cost of hedging frequently reduce real estate profits.
Speakers declared Hong Kong one of the most open economies in the world and cited its cyclicality as a positive for real estate investment. The city has been able to reinvent itself on numerous occasions in order to adapt to changing circumstances, which makes it fertile ground for testing new concepts.
Panelists were keen to declare that, while investment committees might be more cautious about geopolitical tensions, real estate investment professionals on the ground in Hong Kong and China saw massive potential ahead for China’s growing and reforming economy and its demand for real estate.
Sustainability has been on the radar screen of investors in Hong Kong for some time, however now a more structured approach is being taken as the effect of sustainability measures is being quantified in the valuations process.
It is being factored into valuations in three ways: firstly there is an effect on operational expenditures, such as energy consumption. Second is the effect on rents; green certification attracts more tenants and necessary to attract some multi-national tenants, which is reflected in rents. Finally, sustainability can affect the cap rate, which a lot of investors are concerned about due to the higher interest rate environment. However, these effects have been harder to quantify because of the lower transaction volumes during covid.
A major concern for Hong Kong’s landlords is meeting the sustainability requirements of tenants. Many believe that asset owners who do not address these issues will see a negative effect on revenue and this in turn will hit the valuation of their portfolio.
Speakers argued that the costs of making a real estate portfolio more sustainable were justified for long-term owners by cost-savings, improving rents and values, as well as future-proofing the portfolio against climate events such as flooding and extreme heat. Green finance means landlords who adopt ESG measures can obtain cheaper debt too.
The sheer scale of investment needed to decarbonize Hong Kong and China – estimated to be a trillion dollars in Hong Kong alone – provided huge opportunities for lenders and investors. At present, there is probably more finance available than green projects, conference delegates heard. While the cost savings for green loans are rarely substantial, panelists argued that the process of complying with green finance terms allowed companies to integrate their ESG processes and teams with the wider business and have a proper dialogue with investors.
However, factoring sustainability into investments in Asia Pacific is not straightforward, due to a lack of high-quality data and slowly evolving regulations, which leave the region somewhat behind Europe, where the EU is leading in regulation.
Likewise Hong Kong has had little traction so far with green leases, which made it hard for landlords to get to grips with Scope 3 emissions. Nonetheless, landlords are informally sharing information and cooperating in this regard.
2023 ULI Hong Kong Conference Photo Album