Not too long ago — fewer than 60 days ago — Hong Kong property prognosticators were looking down the barrel of a sedate year for real estate, particularly in the residential sector. But in the way markets have taken a turn in other parts of Asia-Pacific (see: International) there have been some early surprises in the local market.
Last year’s late inning manoeuvres to cool the residential sector with the Special Stamp Duty and the Buyer’s Stamp Duty worked. Sales volumes dropped and prices dipped in the weeks immediately following the announcement. The initial investor reaction was to shift capital into other sectors (chiefly retail and commercial) but most analysts expected that to drop off once prices fell enough to offset the extra duty.
Things look quite different in the early stages of the Year of the Snake.
A Change of Course
The forecast for 2013 at the end of last year and early in January was all about caution, muted activity and a move to alternate sectors, like retail and commercial. Toggling between prices rising around 5 percent and then falling 10 percent seemed to be on the standard according to agencies such as Colliers International, Knight Frank and Centaline. Regardless of its generally optimistic tone, Knight Frank’s Asia Pacific Property Market Outlook 2013 estimated that, “Due to uncertain market conditions (such as new taxations and cooling policies imposed by the government), potential new home supply in the future and the continual effect of the BSD and SSD, transaction volume is expected to drop 10-15 percent in 2013.”
CBRE Luxury Residential Marketview cited similar patterns, with subdued demand, softening leasing rents and, again, shifting capital. “Nevertheless, future supply in the luxury sector will remain tight and should support future price growth.”
But then came Chief Executive Leung Chun-ying’s Policy Address. “The residential market regained momentum in January, as the negative impact from cooling measures implemented at the end of last year were digested and the absence of further cooling measures was noted in the latest Policy Address,” according to research by Knight Frank last month. The number of residential transactions jumped a whopping 65.2 percent month on month (for 5,430 total) and luxury homes worth HK$10 million or above rose almost as dramatically — 57.7 percent.
Developers are getting more confident as well, and developer activity was up considerably in January. Both new projects as well as unsold existing stock were launched or re-launched with more expected after the Lunar New Year holiday. On top of that, the secondary market picked up, with prices slowly edging up and, “Landlords in strong financial positions were unwilling to sell their properties at discount, resulting in fewer units being available, which in turn drove up transaction prices.” Luxury prices in traditional prestige locations such as Mid-Levels, Island South and the Peak as well as Pokfulam surged.
Still Looking Elsewhere
Which is not to say that investors are returning to the residential sector in huge numbers — or that they’re abandoning newly “discovered” lucrative alternates. Knight Frank noted that retail investment remained strong in January in core and non-core districts alike. New supply is still thin in prime spots and it’s driving rents up, making retail yields among the best available. And it should continue. “Given sustained local consumption and vibrant tourist arrivals, we maintain our positive outlook for the local retail market,” said Knight Frank.
Colliers International agrees. With both locals and (predominantly) Mainland tourists unafraid to spend, the retail sector is the closest thing to a sure bet investors are likely to see. Retail sales growth was up 9.5 percent in November — obviously before the Christmas and Lunar New Year shopping frenzies. Despite a fuzzy global economic picture, “International retailers continued their expansion plans, albeit with a more cautious approach. Many new overseas brands remained keen on securing prime locations in Hong Kong to set up their flagship stores before continuing with expansion in China or greater Asia in long run,” said Colliers. Among the new players on the shopping scene here is UK retailer Topshop, long a favourite overseas and eagerly awaited in Hong Kong. Not to be outdone, commercial property in Hong Kong is outperforming lateyear expectations. Data from RICS noted the SAR commercial real estate indicators were still positive for rental and capital values. And those cooling measures that diverted all that cash from residential property to other sectors? “As a result of rising investment activities, both investment enquiries and capital values edged up at a faster pace.”
Hitting the Brakes
So January’s surprisingly vibrant market proves, at least, one constant: That Hong Kong’s property industry can turn on a dime. On February 22, the government announced new cooling measures effective immediately. Among the new regulations, stamp duties are going up on all properties (including industrial, office and retail space) from $100 to 1.5 percent of the property’s value, and for properties valued over $2 million the duty is doubling to as much as 8.5 percent. The only exemption is for residents purchasing first homes. The Monetary Authority has also tightened mortgage lending and the maximum loan-to-value ratios for all property has been lowered. To Knight Frank’s mind, this will cool the market in the short term, and the luxury and commercial sector are likely to feel it most. It’s a sign of a concerted effort to avoid a bubble — and there’s probably more to come.