Back To The FuturePredicting precisely where Hong Kong’s petulant property market is heading from month to month is a tricky proposition, never mind trying to make a forecast for an entire year. Nonetheless, almost everyone does it every December or January, and 2012 was no different. At this time roughly 12 months ago, the prevailing wisdom was that residential growth would be flat at best, rents would drop, end-users would dominate, mortgage rates would rise, prime office space would lose tenants to cheaper sub-markets, retail was where the growth was and luxury leasing would see a lot of shifting around with the semi-stagnation of the financial industries. Oh, and Europe and the United States were on the verge of a mighty implosion that would take the rest of us with them.

Clearly, it was a hit and miss year, with few predicting multiple and often sudden cooling measure imposed by the government. However, the short explanation for the year’s relatively strong performance: “In general it’s because nothing happened,” states Thomas Lam, head of research for Greater China at Knight Frank. “The Eurozone debt is not solved but it’s being handled, the US economy seems to have recovered fairly well and the Chinese economy achieved its targets. So it seems all quite smooth. Nothing happened.” As Lam sees it, much of the doom and gloom predictions were over-stated.

Colliers International’s managing director Richard Kirke partially agrees. Though he points out that forecasting is crystal ball stuff he notes that predictions of strong industrial and retail sectors were spot on. “If you look at 2012, we witnessed exceptional growth in retail and industrial. Capital growth significantly outperformed rental growth, and as a result exceptionally low yields were being achieved,” he says. “Last year we forecast industrial growth and it will be similar to next year. I like that sector. The government is reducing industrial supply and very little new supply, so it’s’ going to put pressure on rental growth, which should lead to capital growth.”

Over in the residential market end-users were the lifeline and property overall was saved by retailing. According to Jones Lang LaSalle’s head of retail, Tom Gaffney, capital and rental value on retail space surged 27.1 and 14.5 percent respectively in prime locations last year, supported by steady tourist arrivals largely from Mainland China. “The retail market is still predominantly fuelled by foreign retailers coming to Hong Kong setting up and then branching out with their numerous levels of brands,” says Gaffney. “Local retailers are largely fighting to keep their existing locations, and succeeding for many of them. A lot are looking at alternative locations, not secondary but an expansion.” The same can be said of the commercial sector, where Central rents have peaked and started to drag overall rental performance down. Kowloon East became the place to be in 2012. Central’s rental growth shrank by 10 percent, Kowloon East’s grew by 11, but couldn’t save the sector from losing 3.5 percent of its rental value.

As Joseph HP Tsang, JLL’s managing director explains of the residential sector, “Actually, 2012 performed much better than we expected. We were talking about 10 percent increases in capital value, and it was actually around 20 for mass residential. Well beyond expectation. The need and the drive for mass residential is really strong.” The numbers bear him out. JLL’s final tally for the year was an overall 5 percent gain in capital values in the luxury sector and 20.3 percent in the mass market. Continuing low interest rates and limited supply kept the market active until sudden cooling measures came into play late in the year, though they’ve had only a minimal impact. “I completely disagree with the government that there is too much speculation in the market: It’s all end-users. And who wants to speculate in the luxury market?” notes Tsang.

Chris Liem, principal and owner of Engel & Volkers, agrees. “When you look at the BSD initially, with any market news, a 15 percent buyer’s tax is always going to be prohibitive for a foreign national … But Hong Kong has a lot of natural demand,” he states with regards to the surprise tax and he doesn’t think the instant response will stick. “There [are] still a lot of people that do want to own their own properties; that do want to own their own homes. With the cheap funding rates that we’ve got we sort of expect prices to continue next year. It makes sense to purchase rather than rent. The lack of supply and the natural demand are actually contributing to people still looking to purchase.”

As Kirke sees it, those cheap funding rates were the key in 2012 and will be again next year. A year ago common wisdom also held that the European debt crises and a wobbly American economy would have a negative impact on Hong Kong. Those issues could indeed have had an influence here, but it was “Less than I probably perceived,” admits Kirke. “The biggest driver is interest rates. When I want to know what’s going to happen with Hong Kong property I look at what the Fed is doing.”

Colliers’ executive director for residential sales Ricky Poon can take credit for a relatively accurate forecast, but even he was taken by surprise by the SSD and BSD, as well as the random spikes in the market. “Nobody expected the market to get so hot and no one could predict over 20 percent growth in the mass market,” he notes. If there’s one thing everyone likely predicted was unpredictability. We can always rely on Hong Kong behaving like Hong Kong.