At the beginning of the year, the real estate news was all about a slowing Chinese economy, increasing interest rates and more cooling measures in parts of Asia. Halfway through the year and the picture isn’t quite what people expected it to be. Interest rates are holding steady, the US is recovering better than was predicted, and though China may be calming down attention has shifted from internal economics to external investment. And yes, once again, cooling measures have done little to cool Hong Kong’s residential property market.
No one predicted the Monetary Authority would demand a 40 percent down payment on flats valued at under $7 million — the majority — in February. It was a surprise, and a blow to many homeseekers. Whatever the intent, the measure has done little to bring prices under control. In its mid-year analysis, Knight Frank stated that the surge in end-user demand for small to mid-sized flats (under 600 square feet) had only driven prices up, and expects the mass market to gain up to 10 percent by year’s end. Conversely, luxury prices are still slowing down, and gains will be
moderate. During the first half of the year, the mass market grew six times what the luxury sector did, 1.4 percent to 7.
Some of the activity indeed has to do with mainland buyers, however, they’re having little impact on mass residential prices. “With the recent credit tightening targeting mass residential units, the booming stock market has stimulated demand for luxury housing, while the downturn in China’s real estate market has sent more mainland buyers back to Hong Kong to seek safer investments,” explained Thomas Lam, Knight Frank’s senior director and head of valuation & consultancy. “The market focus is now shifting back to the luxury sector. Luxury home prices are expected to increase 2-5 percent in 2015, while mass residential prices could increase by 5-10 percent given strong demand for small and medium-sized flats.”
As far as investment goes, the smart money is still going to head to other sectors: industrial and offices in non-core sectors like Kowloon East. The majority of new supply will be coming in the New Territories (52 percent from 2015 to 2020), and rising prices are putting downward pressure on Hong Kong yields. Back in 1991, rental yields hovered around 7.5 percent. In 2014 they were slightly under 3 percent and trending down.
Around the Region
On the other hand, a sluggish Chinese economy has prompted Beijing to ease its own housing policies — including interest- rate cuts, lowering the reserve requirement ratio for banks and reducing financing requirements for second-home buyers. Not only has that driven investors back into Hong Kong’s luxury market, it’s boosted prices in first-tier cities and that could trickle into the second-tier as well.
The big news in Asia-Pacific however, is in Australia. Much of that is concentrated on new moves by the Tony Abbott’s government to crack down on illegal purchases in the country’s hottest markets. Even though Sydney remains the heavy hitter — and transactions were down at the end of 2014 — it continues to drive prices in Australia’s eight major markets. Low interest rates and a weakening Australian dollar are also attracting investors, both local and international.
Gross yields average just under 5 percent nationwide, with Darwin at the top of the list at 5.87 percent according to data from Knight Frank Australia.
But key locations in Sydney, Melbourne and a recovering Perth are still where investors gravitate, and investment should remain strong given the country’s positive population growth (projected at 2.1 percent per year to 2030), keeping demand strong. Even with rental yields suffering at the expense of capital growth, Sydney, “Continues to outperform all other Australian cities for capital and rental growth. We expect to see further strong capital growth, although closer to circa 10 percent for the year. As vacancy continues a downward trajectory until new supply reaches the market later in the year, it’s likely that rental growth will continue to rise,” said Knight Frank. Similarly, projections for Melbourne, Australia’s second best performer, are for 5 percent capital gains and stable rents. Brisbane, arguably the fastest growing city, saw sales volume spike 18 percent in 2014, and that is expected to continue for the rest of this year. However, the rental star, Darwin, has vacancy trending upwards,leading to contracting rental rates.
Around the World
Not surprisingly, European property news was dominated by the election in the UK, which ultimately turned into a non-issue. When David Cameron returned to Downing Street in May it was a signal that was business as usual, if not completely smooth sailing. At the end of 2014, Jones Land LaSalle predicted 4 to 5 percent growth for the UK for this year, and that’s likely to happen in the wake of the election. However, “The immediate pause for reflection post-election has been quickly replaced by the need to consider new political risks for housing on the horizon,” said JLL in June’s Cruising Speed. Among those challenges are the UK’s continued association with the EU. Putting the EU in its place was a major talking point for Cameron, but now business leaders are concerned London’s position (and its property market) as world city and key player in the world’s largest single market could be impacted by the UK’s departure. Stay tuned. Also on the
radar for UK markets is the mayoral election in London — a Labour stronghold. A Labour mayor “Raises the potential risk of high-value property taxation in some form, as well as some focus on the rented sector. Most would agree that the plight of the private renter deserves greater support and attention, but the arguments against any tight restriction on rental growth are valid,” said JLL. Finally, the spectre of Scottish devolution lingers. Uncertainty over Scotland’s position within the UK could impact its currently robust market. Nonetheless, the UK future looks bright. Again. “Transaction levels are likely to resume a slow upward trend following the slowdown that has taken hold,” wrote JLL head of residential research Adam Challis. “It will surprise many to note that activity levels are above the 10-year average, albeit still well behind where we were in 2006.” For how long is anyone’s guess.