An end to the low interest rate environment. Mass market rentals as a safe bet. Prime retail rents rising. Those pesky cooling measures. All signs point to a general downtrend in the Hong Kong real estate market in 2014. The question is: How far down?
First, some good news from Colliers International, whose November Global Investor Sentiment Survey found international commercial investors are feeling confident about 2014, particularly in American markets. The survey polled 500 institutional and private investors and found approximately 70 percent planned on expanding their property profile in 2014 — a good sign.
“Worldwide, investors are willing to look beyond political circumstances and invest in areas with strong property fundamentals,” explained Colliers UK and Ireland CEO and survey head Tony Horrell. “In many regions, like the United Kingdom and Asia, investors are willing to take more risk on opportunities that will generate higher returns due to a clearer economic outlook and improving values.” Asian investors are bullish on Asia despite fears of an interest rate hike (maybe in 2015) and stamp duties on commercial properties.
Jones Lang LaSalle predicts investment into Asia-Pacific’s commercial markets will be robust as new capital finds equity. “We will see investors move further up the risk curve in search of higher yield, increasing capital inflows into opportunistic and alternative markets such as Vietnam and Indonesia,” theorised Stuart Crow, head of Asia-Pacific capital markets at JLL in a press statement.
DTZ’s Annual Outlook agreed on prospects for global investors, but noted that real occupancy costs in Asia will rise in comparison to the US and Europe. “Tokyo is expected to lead the cost increase in absolute terms as its economic recovery gains momentum,” said the report’s co-author Andrew Ness, head of North Asia research. Limited new supply is helping yields, and ample new stock will keep prices down in second-tier Chinese and Indian markets. Asia-Pacific is priced appealingly, even though projected growth in some markets has had a negative influence. Tokyo, in spite of its consumption tax increase and need for economic reforms, is the current superstar, and Abenomics can be credited for rising demand and falling vacancies. “Landlords are becoming increasingly bullish on the prospects for future rental growth,” notes Cushman & Wakefield Japan Executive Managing Director Todd Olson. “Investment activity is up drastically, as investors view Japan as a good opportunity with rental growth and the upcoming 2020 Summer Olympic Games.”
According to Knight Frank’s Prime Global Forecast, “Rising interest rates and government intervention in the form of buyer restrictions pose the greatest threat to luxury residential markets worldwide.” Knight Frank predicted the world’s best prime residential performers in 2014 to be Dubai, where prices could climb 10 to 15 percent, followed by Beijing, Shanghai, Sydney and Paris (5 to 10) and London (under 5). China’s current cooling measures are suppressing both demand and prices, but Knight Frank expects Beijing to implement more long-term solutions (property taxes, regulating mortgage policy) to tackle potential bubbles.
Hong Kong View
As Colliers sees things, 2014 won’t be a banner year in Hong Kong. “The downside will vary in intensity, with residential and retail property prices tumbling by double digits, while the others are likely to see smaller single-digit corrections,” said Simon Lo, Colliers’ executive director of research and advisory, Asia. “Only industrial property rents are expected to grow, by a modest average of 2 percent.”
Though forecasting a 5 to 10 percent drop in luxury residential this year, Thomas Lam, director and head of research and consultancy for Greater China at Knight Frank, sees the luxury sector as better insulated than the wider market. “Increased supply and the continuation of stringent cooling measures will be responsible for the reduction in prime prices,” explains Lam. Those cooling measures mean an end-user dominated market this year.
JLL has been one of the cooling measures’ harshest critics, and not just with regards to the commercial sector. JLL pointed to the measures, like Knight Frank, DTZ and Colliers, as the source of weakened buyer sentiment in 2013. “We expect sales activity to remain weak, given the downside risks from looming interest rate hikes and the potential for yet more policy measures from the government next year,” said JLL Managing Director Joseph Tsang at the agency’s annual review/preview. “Therefore, capital values in the residential sector will remain under pressure and continue with mild corrections.” However, Tsang doesn’t think a free fall or total collapse in home prices is on the horizon, “As long as the prolonged low interest rate environment and tight supply situation remain. We believe buying momentum will stay at current levels in 2014.”
An improving economy and limited stock could prop up Hong Kong’s office market in 2014. “The possibility of stronger business in the financial sector may well support demand for office space in 2014. This would not only provide a direct boost for Central landlords but would also filter down to other districts given the low vacancy rates which are a feature of the market at the moment,” said Rhodri James, executive director of office services for CBRE. James warned rental growth could suffer by capacity held by current occupiers. “We are far more positive on growth prospects for 2015, when rents in core areas may begin to rise sharply.” Knight Frank predicts core office rents and prices falling up to 5 percent this year; Colliers sees flat rental rates and a 7 percent price drop. “A brisk rebound in demand, notably for prime space, is unlikely in the near to medium term and this will keep rents in Greater Central relatively flat in 2014, followed by more consistent growth in 2015,” echoed Cushman & Wakefield Hong Kong’s Managing Director John Siu.
Finally, despite a slowdown in sales, JLL believes the city’s retail sector is in the best shape — in both core and non-core locations. Mainland shoppers from second- and third-tier cities looking for mid-market goods and affordable luxury will underpin projected sales growth for 2014. “This shift in spending patterns will continue to broaden and benefit mid-end retailers. Against this background, we anticipate retail rents to grow at a moderate pace of about 2 to 4 percent for the whole of 2014,” explained Tom Gaffney, JLL’s head of retail.
Better luck next year?