With the global economy so intertwined, what happens over there will affect here. Be prepared.
Breaking news can be a scary concept for professionals in commercial real estate. Transactions take time, requiring relationships among parties that are transparent, comprehensive, and stable. But in the political climate of 2019, how can one prepare for the unexpected?
Take the ongoing trade war between China and the United States — and its effects on the global economy. Or look at the political unrest in Hong Kong, with its impact extending throughout East Asia and the world.
Chris Lo, director of the Hong Kong Trade Development Council, is uniquely positioned to speak on these matters. In his role with the HKTDC, he aims to facilitate U.S. investment in and trade with Asian partners, particularly in Hong Kong and the rest of China.
Before trans-Pacific tensions resulted in tariffs, international investments in commercial real estate were strengthening. “In general, investment flow follows opportunities arising from profitable economic activities,” Lo says. “Emerging Asian economies and stable growth in developed markets offer fairly promising incentives since the last financial crisis. The change in capital outflow policy in China and the trade friction between economies create differing demand for cross-border investment, such as investment related to the shift of global supply chain management, CRE investment in the U.S., etc.”
That friction is a variable that, depending on the length of the trade war, can be a small bump in the road to greater cross-border investment or a long-term weight on both economies. “The U.S.-China trade war adds uncertainty to the market due to the abrupt change of policy,” Lo says. “It also partially deters the market sentiment from investing in and from the U.S. and China. Many are having a wait-and-see approach, while some non-mainland Chinese investors may look into potential for long-term investment.
“If the conflict cannot be resolved between the two largest economies of the world and uncertainty continues to increase, it does not seem to be favorable investment environment, and there would be a continual stagnancy or slowdown in investment.”
Born and raised in Hong Kong, Lo is concerned about the social unrest and the interruption caused to businesses and investors related to the protests that have swept the region in recent months. But from a professional point of view, he believes the strength of the local economy will help Hong Kong weather the current instability and minimize any long-term consequences. According to the Global Competitiveness Report 2019 from the World Economic Forum, Hong Kong moved up four places from last year, joining Singapore and the United States in the top three competitive economies.
“I hope that the issue could will be resolved peacefully soon,” he says. “In the short term, there would be an impact to the CRE market in Hong Kong, as seen from a dropping transaction number and business sentiment to commit to new investment in the last quarter. Hong Kong’s economy is resilient, and it has strong fundamentals including free flow of capital, the investment environment, and the rule of law. The core asset value of the residential property market, for example, has shown its strength as of now. I believe that after some adjustment, the market will bounce back.”
While these specific situations have global impact that extends well outside the real estate market, commercial real estate professionals must be able to react, adapt, and overcome such obstacles if they want to succeed, domestically or internationally.
“CRE professionals need to see the market in a long-term perspective to weather short-term shock in the market,” Lo says. “The pivot of middle-class consumers will continue to shift to Asia, and the more integrated intra-Asia economic activities will see the market grow in the longer run. A diversified portfolio can always help reduce the risk exposed to the unforeseen instability.”