Armchair quarterbacking is a pastime many of us enjoy. “George Lucas should never have added that CGI to the classic movies,” is a common refrain from people who lined up for hours to see the (dreadful) valued added Star Wars trilogy. A few naval types may have uttered, “The Lusitania should have taken the northern channel,” in 1915. “The Lehman Brothers should never have invested in subprime mortgages.”
All those moves seemed like logical decisions at the time and have been subjected to second-guessing ever since. Analysts and researchers do their best to predict where property markets are likely to go in any given year — and sometimes, like in 2015, they’re bang on the money.
The only real forecast that everyone got wrong, for logical reasons, in 2015 was one that predicted an interest rate hike. Twelve months ago all the smart money was on the Fed raising interest rates, edging Hong Kong farther from its negative interest rate environment. That didn’t happen, and rates stayed low. As Simon Lo, Colliers International’s executive director of research and advisory for Asia points out, things are quite different than they were 365 days ago. “The overall picture we’re observing now is that payrolls have started to increase, as well as wages, in the last few months. That’s helped bring rates back to a more balanced level,” he says, admitting rates have been predicted to go up for at least three years running. “Yes there have been lots of noises about interest rate cycles but we’re confident it will happen this year, but it won’t be as drastic as it was in 2006. It will be 100 basis points, maximum.” It is expected that Federal Reserve Chair Janet Yellen will, possibly on December 15, finally raise rates.
Interest rates aside, forecasts were accurate on the direction of Hong Kong’s core sectors — with rental and price growth in offices, luxury apartments, townhouse and industrial properties all coming to fruition. Simon Smith, senior director for research and consultancy at Savills in Hong Kong, cops to underestimating Central’s premium office space and retail correction and admits, “We didn’t anticipate the speed of adjustment in [retail] rents on the high streets.” Retail rents fell 30 percent according to Savills, 25 percent according to Colliers, and the bleeding isn’t expect to stop in 2016. On the residential front, market sentiment was weak and transaction volume was low, as the expectation gap between buyers and sellers widened.
Jonathan Gordon, distribution director for IP Global agrees that Hong Kong behaved pretty much as expected. “Overall Hong Kong fared as we thought it would: the major developers have kept incentives up whereas the secondary market has moved sideways or lagged. Yields are being compressed as prices have moved up more quickly than rents. In prime areas you are now lucky to get 2 percent, and in other areas 3-4 percent would be impressive. At the moment though, your debt is covered to a large extent,” he explains. Gordon thinks that spread will widen along with rising rates, which will ultimately affect the investment market. In 2015, investment property transactions were down 36 percent from ’14 and value plummeted 9.2 percent. Take out late entry transactions at Mass Mutual Tower and One HarbourGate and those numbers balloon to 37 and 29 percent. However, patience will once again prove a virtue. “From a capital perspective, however, I am confident that property will be worth more in 15 years than today,” finishes Gordon.
Overseas, there was relatively little movement in the markets. London and New York continued to be solid investments, with strong capital gains and consistent tenant pools. Berlin and Tokyo continued their march towards investment respectability, with Abenomics holding firm and Germany’s upmarket economy chugging along despite a foundering Chinese economy. If anything was set to shake things up it was politics, with three perpetually popular investment destinations facing elections or governmental manoeuvring that could have major ramifications. A UK election that reconfirmed David Cameron’s pro-business mandate in May, an October Canadian election that swept Justin Trudeau’s free-spending Liberal party to power and an Australian leadership spill in September that saw Malcolm Turnbull oust Tony Abbott were all potentially tumultuous but ended up causing very little in the way of flutter. Cameron is expected to hold the line vis-à-vis investment and housing supply — or he was until the Special Duty Land Tax was announced. Trudeau almost instantly transformed Canada into Canada again and hinted at moves that would benefit the real estate sector, and Turnbull, while not planning an election anytime soon, has won back some favour for his Liberal Party and is emphasising social progress and economic stability. For now. Stay tuned for 2016. It could be an interesting year.