It was quite a year in almost all of Hong Kong’s property sectors. There was new life in residential, a changing of the guard in retail and fresh blood in commercial as just a few notable timestamps. Before we take a look at the year ahead, let’s take a glance back at where we’ve come from.
The big news in residential property was the easing on the Double Stamp Duty in May. When it was introduced in February 2013, it effectively killed sales, which dropped to fewer than 4,000 per month at times. But the relaxation of the widely loathed tax, “Boosted buyers’ sentiment and increased home sales. Developers took advantage of the improved market sentiment, sped up their new launches and offered attractive prices and other incentives, such as subsidies to cover the extra stamp duty, which worked to boost sales numbers,” says Joanne Lee, research and advisory manager at Colliers International. The pull back also allowed the secondary market to ease up on aggressive discounts designed to lure buyers.
A great deal of the fresh activity starting in the summer can be attributed to pent up demand by end-users, who currently dominate the sales market, and rents rising at a higher than expected pace. The year ended on a stable note, with flats up to 1,000 square feet in high demand, mass market capital values up roughly 8 percent and the primary market finding success by absorbing the DSD. “Prices were generally resilient due to the fact that Hong Kong remained in a negative real interest rate environment, meaning the residential mortgage rate is about 2.5 percent but nominal inflation is about 4 percent,” Lee finishes.
Commercial and Retail
The office market is, not surprisingly, tougher to read regardless of the simple principles that apply to it — supply and demand. Supply in premium districts (Central, Admiralty) and premium towers is limited, Kwun Tong and Kowloon East are coming on strong and major financial multinationals are finding their inner frugality. Nonetheless the office sector stabilised to a degree, vacancy rates were at a record low and the draw of roomier, cheaper space across the harbour was only marginally appealing. “Despite supply being tight, rents have stabilised, with most tenants set to remain in situ,” Colliers’ Executive Director of Office Services, Hong Kong Wendy Lau noted at a press conference.
But on the retail front, things were different. China’s continuing anti-corruption kick and the protracted pro-democracy/Occupy protests in Central, Mongkok and, crucially, Causeway Bay have all led to Hong Kong losing its place atop global retail rental rate standings. Research by Cushman & Wakefield states prime retail rents across the globe rose 2.4 percent (to September) in 2014, but fell in Causeway Bay by nearly 7 percent. “New York is once again the most expensive shopping destination in the world and for the first time since 2011,” said C&W global head of retail John Strachan. “Upper Fifth Avenue also set a new record for the highest retail rents ever recorded.” New York, Hong Kong and Paris are the top three locations, at US$3,500 (HK$27,000, a 13.3 percent surge), US$2,735 and US$1,556 per square foot per year. Though with a $180 million shop sale in March, Hong Kong’s retail supremacy could make a return in 2015 and beyond.
In addition to its luxury spending curb, China made its presence felt on SAR property. Joining wealth funds, banks and developers in the land acquisition game were insurers, now permitted to invest up to 30 percent of their assets in overseas markets. “Investors today are shifting their focus towards sustainable returns in the long term. The key factors for Chinese investors are the policy push from the Chinese government to diversify into other countries, a softening domestic market and the pull from higher returns achievable in overseas markets,” noted Neil Brookes, head of capital markets for Asia-Pacific at Knight Frank in a statement. Mainland insurers currently pour roughly 2 percent into foreign investments, but that could easily soar in light of new allowances announced by the China Insurance Regulatory Commission in February.
China’s insurance industry is the fourth largest in the world, and its need to protect itself could potentially translate into more Chinese land purchases in Hong Kong. Jones Lang LaSalle Managing Director Joseph Tsang believes local developers are being cautious given the one-two punch of rising construction costs and political uncertainty, not yet a deterrent to foreign investors. Land premiums are dropping to levels from a decade ago and the message is that down deep the market, particularly residential, isn’t as healthy as it seems. Local builders are losing confidence, “But there is new blood in the market. Developers from Mainland China and Macau are coming into the market, and that’s healthy. So where do you want to bet? On the traditional wisdom or the new guy?” asks Tsang. Check back next year.