A mid-year review of Hong Kong's property market

 Hong Kong At the end of 2016, residential property prices were cooling (relatively speaking) and the commercial market was stabilising, despite local developer disinterest and weak residential yields. What a difference a few months makes. Prices crept up 4% between December and June to exceed peak 1997 prices by 85%, and the Hong Kong Monetary Authority (HKMA) was again prompted to act. The HKMA’s moves are unlikely to improve the affordability ratio Knight Frank put at over 70 in its mid-year market review: ideally, it’s under 50, and at its worst, it hit 130 (during the 1997 crisis). Get ready for another pricey six months.

>> Regular rate hikes put Hong Kong’s housing market to the test

Primary demand

Sales transactions grew in the first half of the year, and Knight Frank projects total volumes for 2017 will be up as much as 10,000 transactions over last year. Once again, the primary market was the locus for the action. Only 69% of sales were in the secondary market so far this year, down from 90% in 2010. Nonetheless, with prices continuing to rise and demand steady, the HKMA introduced new cooling measures on May 19. Borrowers for second mortgages will have to hand over 10 percent more as down payment, those with incomes from outside Hong Kong will face tighter restrictions, and banks must hedge against a market downturn, raising the risk-weight floor from 15% to 25% for new mortgages.

None of that will slow price growth according to Colliers International, which reasons the financial strength of most owners makes the moves moot. JLL’s Ingrid Cheh, senior manager of research agrees. “The new measures, primarily targeted at investors in the market, are unlikely to have a significant impact on the current market dynamics, especially as pent-up demand from first-time homebuyers remains strong.” First-timers accounted for 90% of all transactions this year so far, and cash-rich investors are still coming in. “Under the new measures, buyers will continue to have a preference for properties in the primary market, given financing options and other incentives being offered.”

Those incentives came under fire too. A week earlier, Arthur Yuen, HKMA's deputy chief executive directed lenders to revise their risk management policy for lending to developers offering just those incentives. “The LTV ratios of these mortgage financing plans often exceed the prudential requirements on property mortgage lending applied by the HKMA on authorised institutions (AIs),” stated Yuen. “Moreover, the lending practices adopted by some of the property developers are inconsistent with prudent lending practices followed by AIs.” While conceding the total mortgage value extended by developers is relatively small compared to banks, it’s rising — rapidly. In that light, banks need to review their credit risk to those developers. Banks were also directed to reduce site financing and construction cost lending caps by 10%.

>> High mortgage rate is a catalyst for rising home prices

The HKMA fails to address why buyers are flocking to those developer incentives, but they’re probably not going anywhere. “I don’t think [the HKMA measures] will have an impact, not for Hong Kong developers. The debt ratio for Hong Kong developers is among the lowest in the world. They’re cash-rich,” theorises Knight Frank’s Thomas Lam, senior director and head of valuation and consultancy. “The government and the HKMA’s aim was to safeguard the banking system.” In other words, not to help middle-class Hongkongers buy homes. Knight Frank believes prices will climb 5-10% this year, with JLL predicting 10-15% across the board.

The inability to predict government cooling measures that juice the primary market is the biggest uncertainty right now, “However, as there were quite a lot of new units [supplied] in the past few months, we think that price will stabilise for a short period of time,” says Joseph Tsang, managing director at JLL, who also believe the time has come for the government to review its measures in order to free up the massive supply in the secondary market: 1.2 million private units.

Hong Kong market review

Commercial buzz

On May 16, Henderson Land purchased the world’s most expensive commercial plot for a record-breaking $23.38 billion. The old Murray Road carpark has the potential for 465,005 square feet of gross floor area and was the first Central commercial plot to go up for sale in 20 years; the next two will go up for sale in 2018 and ’20 at the earliest. Two weeks later Nan Fung Group broke Henderson’s record by purchasing a 200,000-square foot Kai Tak site for $24.61 billion, with a potential for 1.9 million gross square feet. In both cases, Mainland developers were shut out of the action.

“Despite the lack of mainland Chinese interest in this tender, we expect the capital values and rents in Central to stay high due to strong underlying demand,” said Colliers in a statement. “Investing in properties in the core-CBD should remain popular despite the very high prices. In fact, the high expectations for the Murray Road site have already driven up prices in the vicinity.” Office units in Fairmont House and the Far East Financial Centre later sold for record highs of $28,200 and $38,000 per square foot respectively.

Nan Fung saw the value in Kowloon East’s ongoing development. The future Shatin-Central link is a feather in the site’s cap, in addition to the enormous footprint and mixed-use zoning. “It explains why this site is even more sought-after than the record-breaking Murray Road site,” argues CBRE’s Marcos Chan, head of research for Hong Kong, Southern China and Taiwan.

“Due to its prime location in Kai Tak, the site will generate strong demand from both office and retail occupiers. With continued development of commercial amenities and convenient public transport facilities in the area, Kai Tak is well-positioned to establish itself as a CBD.” And you thought office space was expensive now?

>> Issue 271: 20-year growth spurt of Hong Kong property market

>> Issue 273: A whole new world