Was 2013 a rocky year, smooth sailing or pretty much what was expected for Hong Kong property?
What did the Fed do, how did investors respond, did interest rates stay low — and what about new cooling measures? Those are the most common questions we all ask as a year comes to a close while wondering if we did the right thing vis-à-vis buying, selling and leasing property. Of course, hindsight is 20/20 and predictions for the next year (next issue) are educated guesswork, but that’s not going to stop anyone from looking back and sizing up how Hong Kong’s market performed.
Not So Sweet
“Market sentiment continued to weaken in Hong Kong, as the numerous rounds of cooling measures and the first hand sales ordinance, effective from the 29th April, saw price growth suppressed. Developers have reacted by redefining their strategies and postponing project launches.” So said Knight Frank’s November Asia-Pacific Residential Review, a sentiment shared by Jones Lang LaSalle’s Year-end Property Review 2013, noting transactions slumped by a whopping 38 percent — lower than in the SARS-era market. The residential sector in 2013 was defined largely by low buyer interest, reduced affordability and an anaemic luxury sector. Sales in the $30 to $50 million range dropped an astounding 60 percent over 2012.
But getting a grip on the Residential Properties (First-hand Sales) Ordinance helped new developments pick up steam in the second half of the year, some of which was the result of increased incentives and conservative pricing. JLL noted The Austin and The Cullinan performed fairly well, but that many buyers were still holding out for more price dips in the secondary market. All of this resulted in reduced capital values (2.6 and 1.9 percent in the mass and luxury sectors respectively), and lower rents in the luxury sector on tenants trading down on the back of lowered housing budgets in the financial industries.
One thing remains constant: Hong Kong’s inadequate residential supply. “Supply in the residential sector remains limited. An estimated 16,800 units are slated for completion in 2014, slightly more than the ten-year average of 14,600 units, but still far below the long-term average of 27,000 per year from 1990 to 2003,” said JLL.
Work to Do
The office market was a subdued one in 2013 according to JLL, and overall absorption dropped dramatically from 2012. Leasing and vacancy rates in prime office districts, with the exception of Causeway Bay/Wanchai, varied wildly, with Central seeing its vacancy rate flirt with 5 percent by November. Businesses were being cautious and tending to smaller spaces, and Kowloon East turned out to be the city’s biggest winner for those that did require large floor plates.
Nonetheless, rental rates recovered steadily, posting 1.2 percent growth and Central correcting itself by 17 percent, though Joanne Lee, Manager of Research & Advisory at Colliers International Hong Kong, warns, “The current Central/Admiralty rental correction cycle is far less severe than the previous two, which lasted from 2001 to mid-2003 and from mid-2008 to mid-2009. There has been a much gentler decline in rents and a smaller increase in the number of vacancies over the past 2.5 years.” Correction aside, rents began to dip at the tail end of the year, bringing 2013 overall growth into negative territory.
It’s not all bad news though. New construction has a lot of pull and a change in status for some properties was a factor in the final numbers. “Rents in Tsim Sha Tsui contracted for the first time in three years because of the increasing vacancy rates in a handful of buildings. In Kowloon East, rental growth also slowed on the back of rising vacancy brought about by some owners of newly completed strata-titled buildings shifting vacant units from the sales to the leasing market, and hereafter softening their asking rents as well,” stated JLL.
Shopping not Dropping
Meanwhile, it was the same old story in retail, where Causeway Bay remained home to the priciest retail addresses in the world. With rental prices per square foot per month exceeding US$3,000 — $3,017 to be precise — putting it ahead of tony locations such as Fifth Avenue in New York (US$2,500), Paris’ Avenue des Champs-Elysees (US$1,601, representing a nearly 40 percent rate hike), New Bond Street in London (US$1,047) and Tokyo’s Ginza (US$984).
Global commercial property services firm Cushman & Wakefield’s annual Main Streets Across the World survey reported the results in late November, and echoed what many in Hong Kong predicted at the end of last year: demand by major international luxury brands would drive the SAR’s retail market. “Hong Kong’s Causeway Bay remains the world’s most expensive retail location … and it will further bolster its position once luxury goods sales return to near peak levels,” said Cushman & Wakefield Executive Director of Retail in Hong Kong Michele Woo in a statement, noting it wasn’t just luxury goods that were reaping the city’s shopping frenzy. “Additionally, same-day visitors from mainland China to Hong Kong are driving a rise in spending on household goods and daily necessities, as the demand for ‘convenience retail’ increases. This trend has shifted the spending pattern from just luxury to also medium-priced goods in the city.” Mainland visitors accounted for approximately 75 percent of all arrivals to Hong Kong in 2013 according to JLL, who agreed on the trend to daily items.
Overall, however, demand remained strong and prices edged up despite increasing conservatism — and the non-traditional took over. “More and more retailers were seen looking to expand and open new stores in noncore locations such as prime shopping centres in decentralised locations, leading to a narrowing rental gap between traditional core and noncore shopping districts,” said JLL’s review. “Other strategies used by retailers to circumvent high rents included the opening of pop-up stores and virtual stores.”