Same old, same old

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The highlight of the 2018 property year so far is easily the news of a car parking space selling for an astonishing HK$6 million—the cost of a three-bedroom flat in Kingswood Villas, two bedrooms in Kennedy Town—and setting yet another record. The day after the sale, Chief Executive Carrie Lam offered searing insights about how she was “extremely concerned” to The Standard. She’s on it. 

Sarcasm aside, the first six months of the year in property terms were similar to the previous six months: prices are rising (up 22.8% from April 2017 to 2018 according to Knight Frank and for the 25th straight month), affordability is falling (according to Inland Revenue only 20% of the SAR’s 1.85 million taxpayers can afford an HK$8 million flat) and Cushman & Wakefield forecast another 5% price growth by the end of the year; Knight Frank estimates as much as 12%. Lam should be concerned.

Commercial Matters

If there’s a silver lining in Hong Kong’s property cloud it’s in commercial markets. Rents are trending up in prime Island districts as well as decentralised Kowloon locations; the office sector is as healthy as it’s ever been. Better news though is retail’s continued rebound. Though high street rents continue to sit below record peaks, retail sales grew 12% year-on-year through April, with the crucial luxury goods sector up 24.6%. Premium malls should see continued rental growth—up to 6% for the rest of 2018—as vacant street shops slowly find tenants ready to take up leases while rents are still soft in locations such as Tsim Sha Tsui. Knight Frank’s senior director and head of retail services, Helen Mak, adds, “Overall retail sales have definitely improved…Same-day visitors are the main drivers of this, given the proximity between Hong Kong and the Greater Bay Area.” The region formerly known as the Pearl River Delta is set to capture a great deal of the region’s 66 million-strong consumer market on the strength of forthcoming new transport connections, chiefly the Hong Kong-Zhuhai-Macao Bridge, significantly set to open on July 1—the 21st anniversary of the handover and Lam’s first anniversary in office. 

But just as one challenge seems vanquished another looms on the horizon. Various factors have kept Hongkongers from fully embracing online shopping: only 3.1% of retail sales here were online transactions in 2016, whereas Asia averages 11.1% and South Korea leads the region at 18.4%. Retailers and malls are already reinventing themselves due to changing demographics and preferences, and it is impacting rental rates. Is the sector’s recovery about to be stunted by e-commerce?

“We perceive e-commerce and traditional shops as cooperative partners instead of competitors. Brick and mortar shops are an important channel for brands to provide customer experience,” says Mak. “Besides, many retailers, like F&B, convenience stores and pharmacies, cannot be replaced by online shopping.” In other words, turnover rents are safe. For now. 

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The Home Front

With residential prices continuing their upward climb, it is unlikely the Monetary Authority or any government body is going to loosen the cooling measures that have done what little they can to control the market. Part of the affordability problem—of which Hong Kong leads the world—however, has little to do with land or flat prices. “Housing price growth has far exceeded income growth in the past years,” points out Thomas Lam, senior director and head of valuation and advisory at Knight Frank. “That is why affordability remains a concern, especially for first-time buyers. The government should actively look for a long-term solution to the issue.” That’s easier said than done, as global trade relations are taking a hit worldwide thanks to Washington’s belligerence, and interest rates are normalised. Those factors influence business sentiment, the kind that leaves Hong Kong with a glut of medium-earning jobs or stagnant salaries. 

Without incomes to match, the HKMA is right to keep LTV ratios high (demanding 60% down payment in some cases) in the event interest rates rise (which they will). Not even unlocking the massive 1.2 million units of supply is likely to help affordability as Lam sees it, and will only lead to more available stock—which the BSD 12-month exemption was supposed to help. “The current exemption of stamp duty only helps people who own one flat change to another. The total number of flats on the market has not increased,” he argues. 

Nonetheless the secondary market has rebounded in the first half of the year. While primary sales peaked at 31% in 2016, Knight Frank estimates they’ll fall to 25% this year, and Alva To, Cushman & Wakefield's vice president and head of consulting, Greater China, thinks the BSD exemption did work. “There are increasing cases of secondary sales because the resale restriction in the form of stamp duties began to expire and thus has freed up some of the secondary supply.” To argues developers are feeling confident, and all the factors for sustained price growth remain in place, positing that “home prices are not going to falter any time soon.”

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Days to Come

Perhaps they won’t fall, but supply could be bolstered in the second half of the year, thanks to June’s officially announced vacancy tax. The thinking in LegCo is that levies on unsold, vacant stock that developers traditionally keep (or hoard) as they wait for price increases would compel them to release them instead. Unsold flats account for over 20% of all residential vacancies in the city—up from 8% in 2012 but below 2006’s record high of 30%. Other measures include unlinking government-subsidised housing prices from private market rates, reallocating six sites previously earmarked for private luxury development to affordable housing.

JLL's managing director Joseph Tsang, called the vacancy tax “a ‘spicy’ measure, which will increase costs significantly for developers.” Adding that “asking prices for brand new residential projects will become less aggressive,” he theorised the tax would have no impact on mass sales. “The government has misplaced its focus. The introduction of the vacancy tax and the amendment to pre-sale consent will only affect the luxury market.” Developers rely on volume, not price, in the mass sector. “The new tax will not trigger a price fall in the property market, but price growth will slow,” finished Tsang. 

Unsurprisingly, The Real Estate Developers Association of Hong Kong opposed the tax, and Colliers International agreed it would do little to slow prices. “The lack of land supply as well as low interest rates are major factors for rising residential prices,” said Colliers in a statement. Whether the target of one million required units by 2046 holds up remains to be seen, but either way there’s only enough land for 600,000. Better still, “it is possible for developers to work around the new tax scheme, for example by extending the construction period, potentially creating a slower housing cycle,” theorised Colliers. “Developers might also shift the holding costs to individual buyers by increasing selling prices, or become less aggressive on bids for new development lands.” The more things change…