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In the balance
Sales volumes are rising due to improved lending policies and the stronger market, but are we looking at a residential rebound or just a temporary rally? Alex Frew McMillan reports
‘‘Despite swine flu, the ongoing economic slump and worsening economic data,some buyers seem to think the market is nearing or has hit some kind of bottom’’
The weather is heating up, and so is Hong Kong’s property market. It is suddenly showing signs of life after a very slow period at the end of last year and the start of 2009.
Developers such as Cheung Kong Holdings and Sun Hung Kai Properties are scurrying to unveil new projects, and are claiming reasonable success in sales. Despite swine flu, the ongoing economic slump and worsening economic data, some buyers seem to think the market is nearing or has hit some kind of bottom.
“The market is defying all fundamentals,” says Victoria Allan, the managing director at the Central-based brokerage Habitat Property Ltd.
Unemployment is still rising, most recently standing at 5.2 percent, and the trade figures for Hong Kong and China aren’t pretty. But interest in real estate in Hong Kong seems to have returned, certainly compared with the very pessimistic attitude people had at the end of last year.
Banks are getting more flexible on lending, introducing a wide range of new kinds of mortgages, and being more reasonable about the loan-to-valuation ratios they will offer. And it seems like the pent-up demand that has been building since last year is beginning to burst over.
“There’s a lot of people sitting on excess cash,” Allan notes. “Where do you put it? Stock markets are hard, there are low interest rates…”
Demand has also been building up over the past twelve months, as most buyers have been holding off any property purchases while they watched property prices fall. Now that the Hang Seng Index has shown signs of life – and after HSBC’s rights issue got off to a strong reception – these wannabe buyers may be taking the plunge.
Real-estate prices tend to follow the bourse, lagging behind stock market gains by six to nine months. So the market rally would be expected to translate into stronger property sales and higher prices later this year. But sales seem to have picked up almost in tandem with the stock-market recovery, without much of a lag.
According to Knight Frank, the number of sales of luxury homes worth HK$10 million or more hit 900 in the first quarter of this year. That’s a massive 57 percent climb over the very slow rate in the last three months of last year.
The number of transactions being made is still a far cry from the start of 2008, when the market was still rising fast. According to the Royal Institute of Chartered Surveyors (RICS), the number of new mortgage loans approved in Hong Kong edged up in February over the previous month but are still down 50 percent compared with last year.
“Such a sharp drop off in volumes will inevitably lead to further price declines in the near term,” RICS said in a report. “However, the pace of declines could be mitigated should the economy gain some support from any improvement in global activity.”
Colliers is predicting that sales volumes may rise by another 15 percent to 20 percent, if the market continues to respond to improved lending policies and the stronger stock market.
The real-estate brokerage DTZ has put out a two-part report, ‘When will the market turn?’ that focuses on real estate in both Hong Kong and Singapore, and predicts when the residential and office markets will recover. Looking at stock-market data, economic figures and the amount of real-estate stock in those cities, the report suggests that residential real estate will recover much quicker than the office market. In fact the commercial sector has only a 1 percent probability of a bounce in the third quarter and a 10 percent probability in the fourth quarter.
“Both the Hong Kong and Singapore office markets have a lower probability of recovering by the end of 2010, compared with the residential markets,” the DTZ report concludes.
Industry watchers say that speculators and investors are loath to enter the market as they are not sure the rally will be sustained. And although there are more sales taking place, the improvement in prices has been more measured.
“The buyers in the current market are mainly dominated by end-users including locals aiming at upgrading their living environment, expatriates and industrialists, with a small percentage of investors and buyers from Mainland China,” Ricky Poon, the executive director of residential sales at Colliers, says, referring to the luxury market.
The average luxury residential price in Hong Kong rose just 0.2 percent in March, compared with the previous month, to HK$10,652 per square foot.
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But prices do seem to have stabilised. Simon Lo, the director of research and advisory who tracks housing data for Colliers, predicts that prices will move sideways over the short- to medium term.
There are plenty of would-be buyers out there who are searching for a bargain. But they may be disappointed by the amount sellers are willing to cut their offer price.
“There’s a lot of people looking for distressed deals, and those deals just aren’t around,” Allan says. “If vendors can’t find an offer, they’re not cutting their price 30 percent like they did last year.”
Hong Kong property traditionally hits something of a summer lull, with plenty of people out of town on vacation. And no one really has a clear picture of whether the problems in the financial world, particularly in the United States, are really coming to an end, or whether the stock market rally is a false dawn.
That makes it very hard to tell if the rebound will be sustained. Brokers say they have had plenty of inquiries around the listingsoutbreak of swine flu, as if property buyers are hunting out negative news that would put them off again.
“It is very hard to read,” Allan says. “A lot of my clients have mentioned that they are quite worried about the third or fourth quarter and whether there will be another dip then.”
Rents and prices have not fallen as much as expected. Areas like SoHo have been hit hard because there are fewer young professionals moving into town. But luxury rents that had fallen around 30 percent have since climbed back 10 percent, meaning the discounts are not as dramatic as you might expect.
Colliers predicts that rents will continue to slide as large multinationals continue to lay people off and restructure their work forces. The average luxury rent is currently HK$36.18 per square foot per month, and as corporations continue to cut costs and housing budgets, the forecast is that rents will fall another 12 percent over the next 12 months.
Some real-estate trackers have suggested the market could rise in a hurry if Hong Kongers are finally convinced that the worst is behind them. But the spring in buyer’s step may not justify that kind of bullishness yet.
“I think the market will level out a bit, but I don’t think it’s going to take off 20 percent or 30 percent this year,” Allan says.
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