Where does Hong Kong go in a post-Occupy world? That’s the burning question on everyone’s mind at the beginning of this new year. Despite economic growth forecasts from the likes of PWC, The Economist Intelligence Unit and UBS sitting at roughly 3 percent in 2015, things aren’t quite that dire in the property sector. The prevailing wisdom predicts a lot of the same with only moderate hits in some sectors with rising interest rates (again) looming. The short version is that it could be worse.
The residential real estate year ended on a high, with total transactions in 2014 up from a year ago according to research by DTZ. Lingering demand and relaxation of the previous year’s cooling measures went a long way towards propping up home sales, with primary launches meeting with success. With end-user activity spiking and some much-needed supply in the pipeline the next 12 months should keep the mass market stable.
“The fact that government land sales attracted increased number of bids from developers … and record-breaking land sale results indicates that developers remain confident in the prospect of the local residential market,” said Alva To, DTZ’s managing director for Hong Kong. “The various incentives and sales strategies of developers interacts with the demand in a positive way and contributes to a healthy and robust development of the market, and this is the outlook we hold for 2015.”
While the mass sector chugs along, the luxury market — apartments priced above $10 million — still faces some challenges. After a 1 percent drop (versus a 7 percent surge in mass) in 2014, Colliers International Manager of Research and Advisory Joanne Lee sees a 3 percent gain for the luxury sector. “Luxury residential prices seem to have stabilised, and we believe the market has bottomed out,” says Lee, adding that even with an interest rate rise, Hong Kong will still be a negative rate market. “Assuming that inflation stays roughly at 4 percent, luxury residential prices are predicted to see an uptick by 3 percent next year,” she says.
Savills agrees, predicting price increases and rental rates of up to 5 percent in the luxury sector. With the impact of the various stamp duties from last year still lingering, Simon Smith, head of research and consultancy services for Savills argues 2015 will be a cautiously optimistic year at the high end. “A possible rise in interest rates in the near-term has played another role in preventing prices from rising. We estimate prices in 2015 will remain largely stable.”
Too Rich for Most Blood
But Hong Kong could also be staring down the barrel of an affordability gun. “Luxury” prices were once defined as over $10 million, but with flats in Taikoo Shing regularly topping $8 million, Shatin’s City One clocking in at $12,000 per square foot (based on DTZ’s numbers) and new launches creeping up to that mark potential buyers have to wonder if affordability is officially an issue — particularly with rate hikes on the horizon.
Knight Frank Senior Director, Head of Valuation & Consultancy Thomas Lam doesn’t think it’s a problem yet. “It’s not ‘official.’ [Affordability] is based on our calculations. This is different from a government statement,” he states, referring to Knight Frank’s estimated affordability ratio of 63 to 79 (based on 4.5 percent mortgage rates and stable or declining prices). “Of course a healthy [affordability level] would be 30 or 40 percent,” he adds. David Ji, Knight Frank’s director and head of research and consultancy for Greater China bristles at the argument. “Affordability is a relative thing. If you’re a fresh graduate and you want to live on Hong Kong Island then it’s not. I think there’s still cheaper housing available. Taikoo Shing may be out of the question but the New Territories might be accessible.” Increased supply is unlikely to change things. “I don’t see developers reducing sales prices as long as there’s a market,” finishes Lam.
When the protesters parked in Admiralty, Causeway Bay and Mongkok largely dispersed by mid-December, the impact of the civil disobedience largely evaporated. Nonetheless, the all-important commercial and retail sectors were most affected — or not — by the Occupy/Democracy movement. “We [didn’t see] a whole lot of impact on office leasing. I think it caused a bit of disruption to occupiers … but in terms of the impact on decision making and occupancy decisions, it was next to nothing,” says Ben Dickinson, regional director and head of markets at Jones Lang LaSalle. On the other hand, “It did have quite a marked effect on retailers, particularly in September and October. But from November it was pretty much back to normal,” counters JLL’s Tom Gaffney, regional director and head of retail. “In the months where it was quite drastic, we did see a slowdown; Central and Mongkok were the hardest hit. Interestingly in Tsim Sha Tsui it was business as usual and going forward a lot of retailers that are continuing to expand understand it’s a big issue in Hong Kong but they’re forging ahead with expansion plans.”
The next year is going to be most interesting for the retail sector, with Cushman & Wakefield already declaring Hong Kong knocked off its global price perch and softening rental rates (along with Knight Frank and Colliers) while JLL and CBRE declare retail rents will hold up fine in 2015. “Rents are coming down because luxury brand sales are coming down,” theorises Helen Mak, senior director of retail services at Colliers. “However that doesn’t mean they’re collapsing. It’s a mild adjustment, or a healthy correction.”
The office sector is one of the bright spots for the year. Demand is up again and the Central district returned to growth last year. Investment into offices should be strong and stable in the immediate future. SME’s could also be entering the market in larger numbers and the continued growth of Kowloon East is a boon to corporates willing to move beyond core areas. Rents should grow in ’15, with central and Admiralty once again leading the charge.
The year’s challenges boil down to the same few bugbears that were present in 2014, 2013 and for as long as anyone can recall, like supply and demand. “A lot of Hong Kong’s success is dependent on China. If we see a significant slowdown up north that will have an impact on demand,” states JLL’s Dickinson. “We do suffer from a lack of supply, certainly in the next couple of years, but we’ve known about that for a long time. From 2017 onwards it should be okay.”
But at the top of the list: interest rates. “We’ve talked about rate rebounds for the past five years but they’ve stayed low … Other than that, I don’t see any problems in the residential market,” says JLL Managing Director Joseph Tsang. “End-users still want to buy and on the supply side it’s still a healthy 18,000 per year. Equally I don’t see an upside. It will be relatively stable.” No news is good news.