The ability to accurately forecast major trends and events is estimating a strong 2013. New governments are entrenched in Hong Kong and set in China, the United States has the benefit of stability with a re-election, and even the white noise from Europe has subsided a bit. Interest rates are expected to remain low and economic analysts are predicting steady recovery across the board.
It appears purchasers will be best served by stepping outside the comfort zone. 2013 could be all about the non-core that will benefit from tight supply in traditional hot spots. In the office sector, improved economics are expected to lead to an increase in leasing demand, however many tenants could be looking to areas like Kowloon East and Hong Kong East, expected to outperform traditional premier districts. Low vacancy rates will help with rental recovery, but with presumed powerhouse Central boasting the highest vacancy rates (4.9 percent) as of the end of 2012, it will be the second half of the year before rates rebound overall.
It’s the same story in the retail sector, where the non-core is coming on strong. Once again, low vacancy rates will help with rental recovery and retail space’s strength should carry over from 2012. But it’s the non-core areas — the fringes of Tsim Sha Tsui, Central and Causeway Bay and emerging Shatin, Yuen Long, Sheung Shui and Tuen Mun — that are expected to perform best.
These growth sectors could be ripe for investment on the back of residential investment money being funnelled to alternate sectors. “I’ve heard the same sort of thing, that with the new stamp duty money will go into the office side, but I think it will take a little bit of time for that to play out,” notes Ben Dickinson, regional director and head of markets with Jones Lang LaSalle. “We saw some pretty large office transactions [in 2012] but I don’t know that that’s a reflection of changing rules in the residential [sector].” JLL managing director Joseph HP Tsang thinks indeed a good number of residential investors are shifting assets. “Part of the reason is the BSD but more importantly people perceive the government as putting all its efforts into cooling the residential market. So why risk your money there?”
And there is the crux of the residential year. JLL believes residential prices should stay stable in 2013 and volume remain thin. Non-core assets will become more attractive due to limited supply, but policy changes remain the biggest risk factor in residential investments. “Since the government first launched the SSD two years ago there have been several more: lowering the LTV, extension of the SSD and now the new BSD. These are all measures that alter the market,” states Tsang, adding that repeated threats of more action keep purchasers on edge.
However, Thomas Lam, head of research for Greater China at Knight Frank doesn’t foresee a bad year. “I would say [the outlook] is quite positive even though there are still some so-called uncertainties and risk factors, both internal and external … From now until Chinese New Year many buyers are going to adopt a wait and see attitude because of the BSD. But it won’t have a long-term impact … I would say it will be three to six months before things are back to ‘normal.’ We’ve seen speculators move to non-residential space and if nothing drastic changes in about six months they might return.”
The impact of the duties is undeniable but, “What I’m not so sure about is whether the government expected the capital flow into the commercial sector that we’ve seen,” theorises Colliers International managing director Richard Kirke. “They’ve really squeezed the residential balloon and it’s bulged out into commercial.” Commercial and retail prices have risen very quickly but investors believe there is room to move. Oddly the BSD may become moot, as potential purchases will be able to stay within their budgets if prices eventually drop around 15 percent — offsetting the tax. Ricky Poon, Colliers executive director of residential sales, agrees that the slump could be temporary. “How long will this last? Only as long as residential vendors keep their prices up. Buyers are waiting for prices corrections.”
Opinions vary but 2013’s overall prognosis isn’t dire. Tsang expects an improvement in the leasing market on the strength of improving economies, and of those “external forces” he says, “That doesn’t really have an impact on Hong Kong. That’s completely isolated.” As Kirke sees it, “We know we‘ve got a low interest rate environment going into next year and a currency peg and unless that changes we’ll have low interest rates. What the government’s done to the residential sector has achieved its goals: they’ve stripped out demand. You’ve got occupiers and maybe long term investors. At the point when the government sees interest rates going up the need for these measures will be reduced,” he finishes. Poon believes a great deal will rely on bank lending policies. “Hopefully their attitudes will change and in three to four months vendors will reduce prices and buyers might start to negotiate.”
But Chris Liem, principal of Engel & Volkers in Hong Kong, is bolder in his forecast. “I’m actually quite bullish on property. When you break down the macro factors, we have easy money from the United States, we have Europe sorting out its problems — which was a big concern last year — and we have China already finished the transition of its government. So positive growth in the US, positive growth in China and structural reform coming in Europe: I feel like we’re headed towards and upswing. It’s a positive statement but I think things will resolve themselves quite neatly.” Check back next year for results.