2012 is fresh out of the gate, Year of the Dragon is around the corner and the city is teeming with people who want a home. With dreadful economic news from Europe and the United States flooding the airwaves for weeks at the end of 2011 a great deal of chatter is about where the property markets are headed for the year. The executive summary: residential growth will be flat at best and end-users will dominate the sector (60 percent), mortgage rates are heading up, prime office space will lose tenants and rental revenue to cheaper sub-markets, investment property is surging (particularly for en-bloc and strata-title offices, hotels, serviced residences and industrial property) and retail is where the growth is.
That’s the long and the short of it, but it may not be as bad as it seems at a glance. “If you’re looking at the big picture, sure, less jobs in finance means less demand [for high end residential rentals]. But I you look at Hong Kong in a structural sense — the government policies, in industrial land use policy and so on. Why are those there?” argues Chris Liem, principal and owner of Engel & Völkers in Hong Kong. The answer to that question is easy. Office space is still in demand, no matter where it is. And while North American and European multinationals may scale back in 2012, “Have we seen the start of the Mainland Chinese companies moving here? There will be demand, so I’m not overly concerned,” Liem finishes. For Engel & Völkers, who deal heavily in leasing across the board, a weak leasing market is a relative thing. The rental market is inherently defensive, and budgets will rotate before they’ll vanish altogether. And with everyone evacuating to lower budgets, stock will once again become scarce and quality flats will always be in demand — at the right price point.
Simon Lo, executive director of research and advisory, Asia at Colliers International agrees. When news of Europe’s debt crisis worsened at the end 2011, “Leasing demand of large units with monthly rental at $200,000 and above originally coming from the financial sector contracted. Although non-finance tenants remain there, their budgets are generally within $150-200,000 for the top senior executives. Lots of downgrading is happening in the market, in terms of unit size but not location,” Lo states. Colliers predicts that residential prices will drop up to 13 percent and rents will take a 6 percent hit — across the board.
The resulting end-user-friendly environment is good news for those actually looking for new homes, and much of that can be credited to the government’s cooling measures, which have slowly been implemented over the last year or so. Speculation is markedly down,sales volume contracted in the second quarter and price consolidation was in the order of a mild 2 to 3 percent. “We do not anticipate the government to lift its cooling measures over the near term until prices come down a further 10 to 15 percent,” Lo theorised.
The SAR’s biggest challenge for 2012 may be what Lo calls “stagflation,” a sort of deadlock between rising consumer prices, wages and rents not matched by demand. “The key challenge to buyers and investors is always the support from banks. Without the relaxation on mortgage lending, volume is unlikely to come back soon. Institutional investors are looking to buy but the level of gearing and cost of financing are their key considerations,” Lo finishes. And if Colliers’ research is correct, the retail market will provide the best investment potential if it can be financed. Ironically, inbound tourism remains strong and retailers in prime shopping districts counted $32 billion in revenue (largely jewellery, cosmetics, electronics and branded fashion) in the first 10 months of 2011. The waiver though: market segmentation. The traditional districts (chiefly Causeway Bay and Tsim Sha Tsui) outpaced their second- tier cousins by leaps and bounds and local retailers got pushed out of those prime spots. For residential browsers in all market segments the question comes down to the trite one of whether or not 2012/Dragon will be a so-called buyer’s market. “That is pretty trite. Because you don’t know what a [vendor] bought a property at in 2009. You’re still a winner there in 2012,” Liem reasons. “They’ve still doubled their money. Are you a loser because you sold at 10 percent less? So it’s hard to say. If I were going to be as simple as that I’d say ‘Yes.’ It’s a buyer’s market because the opportunities will be there. Pay attention.” Lo carefully steps out on that limb too. Even if your mortgage costs more and you may need to put up with extra scrutiny by the bank, the ultimate price offset could be to the buyer’s advantage. “Unless there is a major correction it could be a good bargain. If you’re truly in the market to purchase it’s a good time to at least negotiate.” And do so with more than one bank. Colliers’ Managing Director for Hong Kong Richard Kirke puts it most succinctly in his summary of the coming year — and also threw in a ray of sunshine for good measure. “For the first half of the year transactions will remain low. The rising cost of finance will further undermine purchases, but Hong Kong will the weather the storm better than other Asian cities.” See? Not so bad. Maybe.