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Luxury Property Watch
Prices for luxury property in Hong Kong rebounded faster than anyone expected last year. Can the run continue?
| Text : Alex Frew McMillan | Photo : www.stockxpert.com |
According to the brokerage firm Savills, luxury residential property in Hong Kong shot up 45 percent last year, a breath-taking pace, putting prices back above the levels they reached before the financial crisis.
But few people expect that run to continue this year. Peter Yuen, the brokerage’s head of investment and sales for Hong Kong and Macao, forecasts that luxury residential rents and prices will both rise 5 to 10 percent this year. This falls in line with what most other analysts predict – much slower growth, and incremental gains, if any at all.
“Our view is that in 2010, the key trend is that prices will continue to go up but the growth rate will narrow,” says Xavier Wong, the head of research at the brokerage firm Knight Frank.
Buyers of luxury homes returned to the market in December, Knight Frank says, after a short scare largely produced by Dubai’s financial meltdown. For instance, the Kowloon Station development had 36 sales in the first half of December, more than the whole tally for the previous month. An apartment on a high floor of Sun Hung Kai’s new development, The Cullinan, sold for HK$33 million, a gain of HK$4.4 million for the owner, who only held onto it for nine months.
But speculators may find the pickings slimmer this year. Rents, which lag prices by six months to a year, are more likely to run up in 2010 than home values, experts say.
Wong notes that the yields on luxury rental apartments in Hong Kong fell from 3.4 percent to 2.6 percent over the course of last year, as prices ran up and rents fell. But there’s little room for yields to fall further, and luxury rents are likely to rise around 15 percent this year, Wong predicts.
“In the first leg of the recovery, in 2009, the prices were jacked up mainly by lower interest rates and a lot of liquidity, and the improvement in the resale price,” he says. “In the second leg of the recovery, in 2010, the price recovery will be driven mainly by the recovery in rentals.”
Not everyone is so sure that the market will continue to go up. “My guess is that, in the next half year, there’s going to be a mild adjustment,” says John Au-yeung, a broker with Fidelity Real Estate & Management Co. Prices have risen too far too fast and may drop as much as 15 percent, he believes, as the market makes sense of the rapid runup in prices last year.
But Au-yeung is sure that the prospects for luxury property in Hong Kong are good for long-term investors. Thanks both to local demand and macro-level economic trends. Interest rates are likely to remain low until there are clear signs of recovery in the United States’ driving demand. And there’s still low supply in the luxury property market.
“I think in the long run it will go up for a long time.” Au-yeung says. “So much money has been issued around the world that I don’t think they will contain the coming inflation.” Real estate, of course, is a popular way of protecting against inflation.
Fidelity has also seen the impact of the large amount of money moving into luxury property in Hong Kong from across the border.
“Most of our largest deals are from mainland Chinese buyers.” he says, adding that, by value, the deals accounted for around 60 percent of Fidelity’s business over the last year. “They are entrepreneurs, business owners and a few of them are developers in China.”
Although many of the Chinese buyers don’t require bank financing and pay for their properties in cash, Au-yeung is worried about whether the flow of cash will still continue. Beijing is making increasingly harsh pronouncements on reining in property speculation, and has already started to act by raising the minimum downpayment on second homes from 40 percent to 50 percent of the purchase price.
Many market watchers expect more serious curbs on mainland money flow this year. That could hamper the high-end market in Hong Kong.
“If the Chinese government is going to impose austerity measures and tighten up money, there will be less money available to buy properties in Hong Kong.” says Au-yeung. “And that will have an impact. It really depends on what the government is going to do.”
Though both the governments in Hong Kong and China say they are ready to act to curb property speculation, meaning they’re looking to let the air out of any bubble before it gets too big, they have also shown that they have the will and the way to turn the Hong Kong and Chinese economies around if there’s another downturn.
Residential real estate is looking a bit “toppy” in greater China, according to Frank Marriott, the senior director of real estate capital markets in Asia for Savills. For big institutional investors, he favours other sectors of real estate such as retail or office space over the near future.
But since property sellers in Asia don’t have great options for their money – they’ll be getting basically zero returns on any money they have in the bank, and stock markets continue to be wildly unpredictable. Marriott expects that most vendors will hang on to the properties that they have since they’re also aren’t distressed sellers like there are in Europe and the United States, which will be better hunting grounds for bargain seekers.
“It’s going to be a pretty boring 18 months.” Marriott says. “Volumes are going to be very, very thin in Asia, which is good as the market needs to consolidate.”
‘‘Volumes are going to be very, very thin in Asia, which is good as the market needs to consolidate.’’
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