【Iran Crisis】Citibank: Hong Kong may be able to attract some capital and talent from the Middle East to boost demand for residential and office spaces

Citigroup releases a report indicating that geopolitical instability in the Middle East may prompt investors to reassess their asset allocations, potentially leading to capital flows into “neutral” Asian financial centers such as Singapore and Hong Kong. Hong Kong may absorb some of the Middle Eastern capital and talent outflows. Given Singapore’s enhanced anti-money laundering framework starting in 2024, China’s cautious stance on the US-Iran conflict, and Hong Kong’s lower tax rates, Citi believes Hong Kong is well-positioned to attract some capital inflows. The influx of capital and talent into Hong Kong could boost demand for residential and office properties.

The report states that as local and mainland demand surpasses the completion volume, Hong Kong’s residential market is in a net absorption phase (demand exceeds vacancy). Citi believes recent stock price corrections driven by profit-taking are diverging from fundamentals. The bank’s top picks in Hong Kong real estate are Sun Hung Kai Properties (00016), CK Asset Holdings (01113), Swire Properties (01972), and Hong Kong Land.

If local inflation accelerates faster than nominal interest rate adjustments, Hong Kong’s real interest rates may decline.

Citi states that although the market assumes higher global oil prices (up over 80% since the beginning of the year) will push up policy interest rates through inflation, it also emphasizes the role of crude oil as a “currency anchor.” For an economy to maintain lower nominal interest rates with a stable exchange rate, it generally requires higher oil prices, narrower trade deficits, and more stable equity markets. For example, higher global oil prices can increase global demand for US dollars, effectively tightening dollar liquidity and supporting the dollar exchange rate, even with lower nominal interest rates. In emerging economies, a weaker local currency can lead to higher import prices, sometimes causing extremely high inflation; once foreign exchange reserves are depleted, negative real interest rates become particularly challenging.

However, for Hong Kong, Citi believes the risks appear more controlled. The Hong Kong dollar is pegged to the US dollar, with foreign exchange reserves totaling $439.2 billion, and Hong Kong’s nominal interest rates are mainly linked to US nominal rates. Although local inflation pressures can be alleviated by more low-cost imports from China, if local inflation accelerates faster than nominal interest rate adjustments, Hong Kong’s real interest rates could decline. Given limited and inflexible land supply, this supports property prices. Compared to the 1997-98 Asian financial crisis (when oil prices plummeted due to severe demand shocks and Hong Kong faced soaring real interest rates), Citi’s current risk scenario for Hong Kong real estate assumes a well-supported linked exchange rate system with ample foreign exchange reserves, rising oil prices, and stable real interest rates.