Halfway through 2014, we ask the same question again: Where does the property market stand? Recently, all eyes have been on the city’s biggest corruption case ever. The billionaire Kwok brothers who pulled the strings in one of Hong Kong’s largest developers, Sun Hung Kai Properties (SHKP), have gone on trial. Just as SHKP is dogged by uncertainty over its future leadership, Hong Kong’s property market is becoming less predictable. Industry watchers have mixed opinions on where the market is headed.
With cooling measures in place, Knight Frank and Colliers International predict an average of 10 to 15 percent fall in home prices over 2014. The International Monetary Fund similarly warns over the risk of a property downturn and falling home prices. Adding to that cloudy outlook is the effect of Fed tapering on interest rates. “This will impact those repaying mortgages, as interest rates are expected to increase by 2 to 3 percent within the next three years,” says Simon Lo, executive director of research and advisory at Colliers in a report. A liquidity crunch stemming from China’s debt crisis also means cash-strapped Chinese investors are selling their Hong Kong properties, offering discounts of 5 to 10 percent below market average, Lo says.
But others believe there is a silver lining. Citibank and the Bank of Communications both forecast prices of small- to medium-sized residential flats have bottomed out due to delayed interest rate hikes. Another sign of optimism for desperate realtors is a proposed relaxation of the double stamp duty (DSD), a move widely interpreted as a policy U-turn aimed at boosting sluggish home transactions. Financial Secretary John Tsang quickly denied this claim on his official blog, warning that investors should not expect any easing of cooling measures. “The property market still faces high risks. It’s not the right time for unwinding,” he writes.
After all these years, the less impatient are some second-home sellers who are willing to slash prices and compete with developers for buyers’ attention. This might not necessarily work. “With government measures to boost land supply, potential buyers have adopted a wait-and-see approach to look for further price drops,” says Thomas Lam, senior director of head of valuation and consultancy at Knight Frank.
Meanwhile, developers have continued to launch new residential projects with plenty of sweeteners — from payment delays to huge discounts to boost sales before a downward correction. For instance, to lure potential buyers from the secondary market, Cheung Kong and Nan Fung sold their latest Tsuen Wan project City Point at prices from $8,184 per square foot after a 15-percent discount.
Trouble in Paradise
The luxury sector is the hardest hit. Luxury apartment prices dropped 1 percent in the first quarter, and are now nearly 8 percent below their peak in 2012, according to Savills. “2014 will be a tough year for the luxury residential market, with the possibility of a rise in both interest rates and supply creating an uncertain investment environment,” says Simon Smith, Savills’ senior director of research and consultancy.
Falling prices aside, transaction volumes have been cooled by a string of tightening measures. The BSD (buyer stamp duties), SSD (special stamp duties) and DSD have increased transaction costs for both buyers and sellers. According to Savills, only 95 luxury transactions were recorded in the first quarter, nearly a 40 percent fall compared with the 161 transactions a year earlier. “Luxury prices are forecast to adjust by another 5 to 10 percent in 2014,” says Smith in a report.
On the retail front, a slowdown in Chinese visitor arrivals has resulted in sluggish growth in luxury sales and high street rents. For the first time in recent years, the number of vacant shops in major shopping belts such as Causeway Bay and Tsim Sha Tsui has reached a new high — over 200 in May this year. Nevertheless, industry watchers remain cautiously optimistic. Knight Frank’s Lam foresees retail sales to grow in the long term at a slower rate, although a change in consumer patterns from high-end watches and jewels to mid-market cosmetics and apparel will come into play in retail rents.
A sweet spot is however in the office market, as Chinese financial firms are eager to open new offices in Hong Kong for expansion. A slight rebound of 0.3 percent was seen in the city’s prime office rental sector in the first quarter. “This strong demand will support Grade A office rents in the near future,” Lam observes. Another plausible explanation is that the office market has regained vigour, “Riding on the improved sentiment in the finance, insurance and real estate sector boosted by the recently announced partnership between Hong Kong and Shanghai Stock (Exchanges),” says David Ji, head of China research at Knight Frank.
The prevailing wisdom is that the pilot “Through Train Scheme,” which allows investors from both sides of the border to trade each other’s stock markets, will accelerate capital flow between Shanghai and Hong Kong. Others remain sceptical of this optimism. Savills doubts its impact on the expansion of Chinese firms in Hong Kong due to uncertainties in the timing and implementation of the policy. “We expect a further rental adjustment to take place in Central, and this should be sufficient to lower overall average rent for the rest of the year,” says Savills’ Smith.
If you are still wondering what to buy and sell amid mixed economic signals, here is a final tip from someone who should know: “Look before you leap”, said Thomas Kwok Ping-kwong, speaking to the media on the sidelines of his graft trial. Although the market for medium- to small-sized flats has stabilised these days, “It’s not time to enter the luxury housing market,” he said. Presumably, no one would lie before the court (building), right?