Time flies. We are half way through 2013 — a time when you’re baked in the city’s blistering heat and soaked in a heavy downpour the next minute. In a rollercoaster year for the property sector, it’s time for investors to ask the same questions again: How well are we doing? Where is Hong Kong’s property market headed in the next quarter?
The big picture is the city’s property market got off to a lacklustre start, plagued by tightening credit and diminishing Mainland buying activity. Sales were quiet in the first quarter after more February cooling measures, although leasing remained surprisingly strong. Hundreds of suit-clad property brokers even took to the streets in mid-June to defend their rice bowl as the gloomy outlook has driven firms to close office. As Simon Smith, senior director with Savills in Asia-Pacific, summarises, “New government measures have brought the market to a near standstill and further price falls can be expected before volumes are re-activated.”
On February 22 Chief Executive CY Leung, who assumed office last year, imposed his toughest property measures yet by doubling the stamp duty on all property transactions above HK$2 million. Home prices have dropped 2.3 percent since then according to Centaline Property Agency. Transactions fell for a third consecutive month in May, down almost 50 percent from a year earlier. Savills predicts residential prices will fall 10 to 15 percent. Less optimistic is Deutsche Bank AG, which forecasts prices may be slashed as much as 20 percent in the next two years.
On the luxury front, realtors forecast an average 10 percent plunge in home prices over the next 12 months. Simon Lo, executive director of research and advisory at Colliers, explains with cooling measures in place, prospective buyers remain on the sidelines while some will resort to the leasing market. As multinational corporations remain cautious in hiring and housing budgets are kept in check, Lo further predicts a moderate decline of 5 percent in luxury residential rents.
The sweet spot, however, is in the rental market, with potential purchasers shifting from buying to leasing. The difference in stamp duty is the cause. Charging 4.5 percent for properties priced at HK$4 million or less and 8.5 percent for higherpriced units has led to market segmentation according to Colliers’ Lo. Smaller properties have become appealing to buyers, thanks to lower transaction costs. The mass residential leasing market has experienced a boom, as tenants whose housing allowances have been trimmed have opted to downsize their properties and move to districts with lower rental costs.
The office and retail market may show some signs of sluggishness. The higher transaction cost stemming from the double stamp duty (DSD) is the greatest deterrent Grade-A office investment, although industry watchers are cautiously optimistic. “Central’s Grade-A office rents will remain largely stable in 2013, while rents in Kowloon East will see 10 to 15 percent growth over the year,” says Thomas Lam, Greater China director and head of research at Knight Frank.
China’s economic slowdown is a daunting concern. With slower growth in Mainland expenditures and surging shop rents in core shopping districts in Tsim Sha Tsui and Causeway Bay, luxury retailers are cautious in expansion. Instead, more will turn to cost-effective space in regional retail districts, Lam predicts. Areas including northern districts along the MTR East Rail Line, such as Shatin and Sheung Shui, are fast emerging as hotspots for cross-border shopping.
The real news right now is whether Hong Kong — a beacon of laissez-faire doctrines — will scrap the DSD and other cooling measures sooner or later. Home prices have skyrocketed to more than double from early 2009, thanks to housing shortages. Since then the city’s property sector hasn’t been off the radar. More than 30 curbs have been imposed: from raising minimum down payment on flats priced about HK$7 million to imposing an extra tax of 20 percent of home value on buyers who resell within three years. In October, Leung slapped a further 15 percent tax, also known as the buyer’s stamp duty (BSD), on all purchases by companies and non-residents.
Kenneth Kwan, chairman of Royal Institution of Chartered Surveyors, is concerned that overt government interference will scare away overseas investors and affect the city’s image as a free market. “With the introduction of DSD, there will be a further dampening of the city’s competitiveness,” says Kwan, hoping the authorities will set a timetable to abolish the policies. The stamp duties have been widely criticised as wrongly targeted at companies acquiring properties for their own use.
Now all ears are on the heated debate. Currently on the table in the legislative council, the BSD and DSD on properties are still not law. A step closer to victory was that the Bills Committee, which was in charge of reviewing the legislation, passed a non-binding motion to withdraw the proposed measures. Nevertheless, it’s still too early to be optimistic.
Let’s not forget the government is rather unwilling to back down. The finance minister’s recent comment ruffled the feathers of most libertarians and unemployed estate agents. “We don’t have sufficient evidence to justify a change in our policies,” Ceajer Chan, secretary for financial services and the treasury told the media. “We have seen transaction numbers drop over the past few months and have achieved our goal.” Be prepared — although it’s hard to imagine a cold winter ahead when it’s over 30 outside.