Nothing in Hong Kong real estate and development is ever perfect. By the same token it’s never totally horrifying. Sometimes government, developers, landlords and buyers make brilliant decisions and sometimes … not so much. To that end our list of just a few of the highs and lows of property in 2014.
The government made it a bit easier, after two years of tightening, to buy a home. “The relaxation of the DSD for upgraders. That was certainly [their] best measure,” according to Joseph Tsang, managing director of Jones Lang LaSalle. By relaxing the Double Stamp Duty, end-users looking to pick up a new home were no longer penalised as heavily for their purchase. “Buyers are still required to pay that stamp duty but they’ve been given a longer period to sell existing properties in order to reclaim the additional duty. That’s probably the most welcomed decision by end-users. As a result I can say quite confidently, particularly for small units, it improved the transaction volume substantially,” finishes Tsang.
Though no new damping policies were launched in 2014, “The only policy that is affecting the market at the moment … is the pilot scheme for arbitration on land premiums,” continues Tsang. The arbitration process was set up to be final word on land premiums — of which the government always wants more and developers want to pay less — allow more land to be modified (such as industrial to residential) and avoid waiting games to increasing land supply. “But the flipside is people not going to arbitration. My only criticism is that the government didn’t think this through. Instead of pushing more land supply to the market it’s reducing it. Developers are just not going to arbitration,” theorises Tsang. It’s not the worst idea, but it’s not working the way it was designed to.
One of the biggest news items of the year was the Mainland government’s decision to allow greater capital outflow, which effectively flooded world markets with cash and stimulated transactions. Spanning a range of sectors, one of the biggest points in Hong Kong was land acquisition. According to figures from CBRE, institutional investment from the PRC topped $10 billion as of November 2014, and that should grow. “The driving force behind the growth of Chinese capital in land investments in Hong Kong is the fact that the territory is a key business hub for Asia and enjoys strong growth prospects for the local property market,” explains Yu Kam-hung, senior managing director for investment properties at CBRE Hong Kong. “Since vacancy levels for Hong Kong properties are low and future supply is limited, we believe that investment appetite from Chinese investors will remain strong and they will continue to look to acquire assets to build an evermore solid footprint in Hong Kong.” Among the notable sales this year: Poly Property Group’s purchase of Kai Tak Site 3 and Talent Charm’s acquisition of a Shouson Hill Road site.
But Hong Kong’s appetite for more is becoming increasingly unsustainable. The WWF’s Living Planet Report 2014 stated the SAR’s ecological deficit — the difference between our per capita footprint and our available biocapacity — was the worst in Asia, double the global average and demanded the equivalent of 540 Hong Kongs to pillage from. In a statement, Conservation Director of WWF-Hong Kong Gavin Edwards noted, “This recent analysis is an alarming signal to all of us that we are overtaxing the finite resources of our world. Hong Kong’s pattern of over-consumption and unsustainable lifestyles should not be underestimated. We know where we want to be — our challenge now is to transform Hong Kong into Asia’s most sustainable city” Probably easier said than done.
Prospects for Development
Four hundred square feet should be the same wherever you go, and RICS spearheading a standard, international floor area measurement is a welcome idea. Will Myles, RICS’ new regional managing director for Asia-Pacific explains the proposed International Property Measurement Standards (IPMS). “In many areas of the world the ‘how’ of what’s measured differs, which means sometimes you can’t have confidence in what’s being measured.” Occupiers and investors are regularly faced with uncertainty and current standards are all over the map. Only in Hong Kong, for example, is the gap between gross and net area even an issue. “The aim is to try and eliminate [variance] and create certainty in the market and confidence in the buyer. It simplifies business and provides so much more transparency if you can apply the same set of standards everywhere.” If it becomes an industry standard, Myles would like to see IPMS expand to retail and residential space too.
Back to the world we live in. A low point for Friends of the Earth (HK), Greener Action, Greenpeace, Save Lantau Alliance, The Conservancy Association, The Hong Kong Dolphin Conservation Society and WWF-Hong Kong was the permit for Hong Kong International Airport’s third runway based on the Environmental Impact Assessment okayed by the Advisory Council on the Environment (ACE, members are listed on www.epd.gov.hk). The ACE did a flip-flop and now claims the mitigation measures proposed by the Airport Authority will suffice when the runway project and the Hong Kong-Macau-Zhuhai Bridge construction overlap in 2016. The original report was predicated on reclamation work being completed and a marine park in operation. That’s not going to happen, and there are currently no suggestions for fixing the problem.
The China Factor
On the heels of the Shanghai-Hong Kong Stock Connect scheme, demand for premium office space by Mainland financial firms has gone up. Knight Frank’s Director, Head of Research and Consultancy, Greater China David Ji says, “Apart from leasing activities, purchasing transactions in the CBD office market continued to improve, with acquisitions being made by Mainland financial institutions such as Bank of China and China Merchants Securities.” That’s good news for Hong Kong’s wobbly office sector.
However that same demand can be hazardous. “When coupled with very limited premier office stock … office rents in prime buildings in the core area are expected to increase further next year. Meanwhile, many occupiers with large space requirements will find it difficult to look for prime office space in the CBD,” Ji continues. Mounting pressure will lead to searches in decentralised locations and as a result drive those rents up.
On the Fence
The recent cooling measures are casting a long shadow. The key question is whether or not they did their job. “It seems to me that a very mixed picture emerges,” reasons Savills’ Simon Smith, head of research and consultancy. “Luxury prices have fallen by 10 percent since 2012 while mass market prices have continued to rise and affordability remains challenging for ordinary Hongkongers, so that could be termed a failure. But I also believe that without the new policies we would probably be in a full-blown asset price bubble by now with disastrous consequences for the housing market and the broader economy. Government has probably succeeded in navigating around this scenario.” Looks like we’re in for an eventful 2015.