Review: Best and Worst of Hong Kong 2016

>> A Review of the Global Property Market 2016


The Best

Londoners, Scots and Northern Irish may not want to admit it, but Brexit, it turns out, was a good thing — at least for Hong Kong. Shortly after the June referendum that saw the UK vote to exit the European Union, institutional capital outflows into Asia spiked, as investors and funds went looking for new safe haven markets, and Hongkongers with a taste for British property were able to take advantage of a relatively weak sterling and a strong US dollar. A lot can happen in the next two years to (maybe) change that course, but for now, Brexit has ironically been a two-way investment boost. As Andrew Haskins, Colliers International’s executive director of research for Asia theorised in November, “In the long run, we expect … Brexit to remind global investors and property occupiers of the potential for shocks in developed as well as emerging countries, and so mitigate political and economic concerns about Asia.”

IPMS: Residential
Most of have experienced the frustration of knowing what size trousers to buy in Hong Kong, but having no idea what that is in Australia, in Italy or in the US. Investors understand this too, and in September, the Royal Institution of Chartered Surveyors (RICS) launched its International Property Measurement Standards (IPMS): Residential Buildings, a new property measurement metric designed to standardise property sizes globally, and put an end to misinformation, particularly for off-plan purchases. How long it will be before the IPMS is adopted by every developer and property agent is anyone’s guess, but for now, RICS members — which include all types of property professionals — can use it as a way to bring added clarity to the investing process.

Kai Tak Density
While discussion over plans for old Kai Tak seems to drag on to no purpose, there was movement on the policy side this year. In October the government unveiled a set of relaxed density proposals that would be, according to CBRE, a better use of land resources than has been suggested. Among the proposals is expanded residential zoning and increased commercial space. Rezoning three hotel sites would accommodate 49,000 flats and 134,000 residents (up from 38,000 and 104,000). The offices would come from increasing the commercial plot ratio (to 6.5 times) and rezoning five sites near KITEC for 4.3 million square feet of office space. It could delay development and launches, but it could also be worth it in the long run for two of the SAR’s most supply-constrained property sectors. If adopted, by roughly 2025 Kowloon East (Kai Tak, Kowloon Bay and Kwun Tong) could rival Central’s commercial footprint. The proposals are with the town planning board.

The Worst

New Stamp Duties
In November, stamp duties in Hong Kong were amended once again, this time eliminating the tiered system for non-residents — the previous 8.5% Double Stamp Duty — and replacing it with a 15% levy across the board for all properties for non-residents and second homes. The aim is to curb speculation, and though transaction rates will slow in the short term, more stamp duties will do nothing to bring prices under control or improve affordability. Joseph Tsang, managing director and head of capital markets at JLL argues, “All these cooling measures … Yes, they ‘cool’ the market for a short period before it picks up again. But from the perspective of helping young buyers for example, it doesn’t do anything. It just makes the second hand market more difficult to sell.” That’s the traditional first step in property, and if it stalls, it creates a huge hole where the middle class should be. Tsang calls this gap a tumour, that, “In my opinion, is getting bigger and bigger and one day it’s going to be huge problem.”

Knight Frank made real affordability and the impact of a potential interest rate hike eminently clear in its year-end data. Senior director, head of valuation & consultancy Thomas Lam noted a 50-basis point rate hike would only add $1,000 on payments for every $4 million mortgaged (over 20 years), but put those numbers in stark perspective too. A homeowner applying for a 50% LTV mortgage on a $15 million home would require a minimum monthly income of $86,000 — a figure applicable to only 8% of all Hongkongers. Eight cooling measures in five years have done little for affordability. “It’s about demand and supply. There’s too much capital in the market,” says Lam. And all the cash that’s driving prices is concentrated in that top 8%. “If you look at the composition of homebuyers in the last five years, I’d guess 60 or 70% are end users. That’s why there are over 200,000 on the public housing waiting list.”

And a Bit of Both

Developer Incentives
For those that can afford it, developers offering 80% or 90% financing on new homes are just what the doctor ordered, and can give plenty of potential buyers with strong, stable incomes a foot in the property door. It’s a sustainable incentive practice for now, but could prove risky down the road — for developers and buyers alike. Most developers have strong balance sheets and debt ratios, but acting as a bank is risky. “I agree. They don’t wan to do it, but unfortunately it’s one of the costs of development,” states JLL’s Tsang. “But they have no choice; if they don’t they can’t sell.” Hence local developers’ caution with land bids, the increase in aggressive PRC players, and fuel for continued rising prices.

President Donald J Trump
Bad as things could potentially get for low-income earners, women, African-Americans, Mexicans, Muslims, gays, lesbians and just about everyone else who doesn’t fit into newly elected Donald Trump’s idea of who a real, “worthy” American is, his unexpected election victory has been good for US stocks and the greenback. The immediate post-election dip in the dollar was a short-lived phenomenon, and the US dollar quickly bounced back in a matter of days, hitting a 13-year high. That makes Brexit even sweeter for Hong Kong investors, as well as properties in Japan (where the Yen remains affordable) and European markets. It also makes it a good time for the vacation we could all use.