A Look Forward at Hong Kong Real Estate 2017

“We see Hong Kong as being quite resilient against all these global uncertainties,” begins Daniel Shih, Colliers International’s director of research. “If you look at GDP growth, it kind of bottomed out in the first quarter of 2016, gradually picking up again, particularly in different sectors. Only retail and wholesale are dragging the economic numbers down, but that decline has been improving.” Shih adds that business confidence is improving, and looking at 2017, he’s cautiously optimistic, expecting it to be “More promising than 2016.” Shih may be the voice in the wilderness, but property prognosticators are, overall, far from preaching doom and gloom for Hong Kong property this year.

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The Commercial Landscape

The biggest concern for Hong Kong’s property market is the continued retail slump. After a devastating 2016 that saw rental rates for prime high street shops slip 17% (and losing Hong Kong its perch atop of the world’s most expensive retail locations list) and prices fall 15%, the downward spiral shows no sign of letting up. Rents and prices could fall another 5% this year according to JLL and 10% according to Savills.

But the cloud has a silver lining. Food and beverage continues to boom, as do “athleisure” and lifestyle brands previously unable to break into the market. Pop-up shops are bringing greater choice to consumers and malls are aggressively remaking themselves into comprehensive “retailtainment” centres with something for everyone — crucial when the consumer market is localising. And for investors and landlords, the sky isn’t falling yet. “A lot of the landlords of prime street shops have been in this market for a very long time. So they’ve bought at very low levels. They’re still very secure with what they’re holding. They’ll discount the rent because they want a tenant, but they don’t want to discount the price. They’ll just ride this cycle,” theorises Savills’ Senior Director for Research and Consultancy Services Simon Smith.

Things are shaping up to be better in the city’s other key property sector: offices. Tight supply and low vacancy are going to make for a banner year in Central, with Savills (up to 10%), Colliers (4%) and JLL (up to 5%) agreeing rents and prices will trend up. JLL argues leasing demand could be subdued, but the launch of the Shenzhen-Hong Kong Stock Connect could buoy demand from PRC firms. The burgeoning Kowloon East district will see its rents drop largely due to more supply finally coming online. That could appeal to MNCs seeking cost-effective back offices and who are relocating back to Hong Kong from China.

“The districts that typically feed Kowloon East — Island East, Wanchai, Causeway Bay and Tsim Sha Tsui — we see [as] staying flat and holding for as long as they can, but by the middle of the year starting to tail off,” estimates Ben Dickinson, head of leasing at JLL. “They’re going to have to start playing defence against Kowloon East rents as that rental difference between the two districts grows to the point where moving from one to the other becomes a cost-sensible opportunity for occupiers.”

Finally, co-working spaces are proving to be less a fad than a new standard: following We Work’s take-up of over 100,000 square feet in two locations, co-working operators have targeted what they see as underserviced Hong Kong for major expansion.

The Home Front

In residential, 2017 is shaping up for more of the same, with the added bonus of interest rate hikes. Expected in small, incremental steps, rates will remain attractive and banks eager to cultivate business. A late year stamp duty softened transaction volumes briefly in November and December, but aimed as it was at speculators, the 15% stamp duty (on second purchases and for non-residents) is unlikely to have a significant impact over the long term given strong demand from end-users.

Mass residential values rebounded by almost 10% after a May low, erasing any price dips (or corrections) during the year. Luxury values stayed flat, demonstrating the relative strength and resilience of that sector. The end result of all that being JLL and Knight Frank both predict residential capital values will rise up to 5% in both the luxury and mass market sectors in 2017. Knight Frank expects luxury rentals to gain up to 2%, where JLL sees them falling up to 5%. Rents in the mass sector should remain the same. However, Colliers International sees residential prices coming down in 2017, as much as 10% in luxury and 5% in the mass, much of it due to the latest stamp duty.

Once again, the primary sales market, where developers with strong balance sheets and deep pockets can continue to incentivise buyers with rebates and high LTV ratios, will dominate transactions this year. In 2010, the secondary market accounted for 90% of all sales; in 2016 it was just 68%. This could be a problem in the long term. Incentives and stamp duties ultimately “Just make the second hand market more difficult to sell. It creates a huge hole where the middle class should be,” says JLL Managing Director Joseph Tsang. “It’s a tumour that’s getting bigger and bigger and one day it’s going to be huge problem.”

The next big movement in the residential market is likely to come from a more fundamental aspect: land sales. Government sales are just one of the elements that will have a (potentially) considerable impact on future residential prices. The land sales market is already competitive, with Mainland developers looking to diversify their holdings and branch out into safe haven markets. Land prices bounced back late in 2016 and with them PRC interest. “In 2016, Hong Kong’s heavyweight developers faced increased competition from both mainland developers and new local players. It has become harder for them to win land sites and we believe the situation will continue into 2017,” says Dorothy Chow, regional director of valuation advisory services at JLL. “Mainland developers will remain active in government land sales to expand their business in Hong Kong whilst local developers will likely focus more on opportunities in the New Territories and MTR projects.”

JLL research indicates over 60% of sites made available for sale by the government received Chinese attention, and 24% of land sales by year’s end went to PRC firms; Knight Frank puts the number at 30%. Competition resulted in 10 of 13 sites selling for well above market expectations, which could put pressure on developers to raise prices in order to earn that money back in the future. Prices, it would seem, are far from settled.