Heightened political risks from rising social tensions will act as the key driver in the world’s most expensive real estate market in the coming five years, according to a recent UBS report.

In addition to a coronavirus outbreak in the backdrop, Hong Kong is dealing with unprecedented conflict as a pro-democracy movement threatens the political status quo. 

«Economic linkages with mainland China will be the most important catalyst for ongoing prosperity in Hong Kong, but we also note that heightened political risks from rising social tensions are increasingly a key point of concern for investors,» said Toh Shaowei, the annual report's author and the bank’s APAC head of real estate research and strategy.

«It is apparent that politics will affect the real estate market in Hong Kong more than anything else.»

Politics Matter

According to the report, signs of stability of Hong Kong's position in the regional and global hegemony is what will «make or break the real estate markets in the next half-decade». Key upcoming milestones to monitor include the 2020 Legislative Council Elections – Hong Kong’s equivalent of parliamentarian seats – and the chief executive election in 2022.

This will also influence Hong Kong’s role in China’s nine-city Greater Bay Area strategy as the regional financial center, international financing hub and offshore renminbi center which will have a significant impact on real estate prices.

China Dependence 

Shrinking Chinese demand will be the imminent medium-term risk faced by the market, especially for commercial properties, the bank said. Anecdotal evidence suggests that Chinese corporates have ceased expansion plans and lease renewals after accounting for one-third of central business district demand for the past three years. The retail sector also faced headwinds after social unrest in Hong Kong led to a plunge in tourist visits last year, especially from mainland shoppers.

«The Hong Kong commercial real estate's dependence on mainland China is a double-edged sword which is hard to unwean,» the report added.