Hong Kong property market – more supply to come?
The media has recently been describing a recovery off lower levels in Hong Kong’s property market as a buying ‘frenzy’. It is general knowledge that property developers have probably more influence than any other sector in Hong Kong – and they certainly do a lot of advertising!
Hence it would make sense to treat the so-called ‘mad scramble’ for properties with at least a teaspoon of salt. But what exactly is happening to the property market in Hong Kong?
As summer comes to an end and the September 2016 FOMC meeting decision is to keep US interest rates on hold, there has been some renewed demand for residential bricks and mortar in Hong Kong.
The first half of September seems to have recorded overall property transactions up by 35%, led by a surge in sales of new apartments. Given both the US central bank and the Chinese government have announced their intention to keep money looser for the moment, those with lots of cash to invest have few attractive ‘safe’ options, aside from real estate.
It is clear that mainland property developers are showing no signs of holding back, and this is also giving support to the market. Because they can sell properties for so much more in Hong Kong than in China, even a lower pricing environment will provide a sufficient yield.
And the Hong Kong government is not taking any action to deter them. In the first half of 2016, nearly two thirds of all A-grade office buildings have been purchased by Mainland property companies.
Moreover, the Brexit shock vote has suddenly made London a less desirous place for Chinese investors. Even if UK property prices take off once more, sterling seems unlikely to appreciate over the coming years.
The UK currency has been on a long term decline, and it is hard to imagine that this will change anytime soon. Nor does the yuan look likely to appreciate. Hong Kong’s dollar-linked currency, not to mention its proximity to the Mainland, will be viewed as more advantageous than hitherto.
It is not just in the property buying market of Hong Kong, but in the leasing market as well, that the presence of Mainlanders is evident in pricing and demand.
So far in 2016, around half of new lettings in Central through the major letting companies were to mainland tenants, and their willingness to accommodate soaring rents has cushioned the weaker end of the market. A recent survey by Knight Frank ranked Hong Kong as no. 1 out of 31 cities for having the most expensive prime office space, at an average of US$278.5 per square foot per annum.
Looking at a longer time frame than the last month or so, runaway property prices in Hong Kong have made buying an apartment well out of reach for many local individual buyers. Therefore, it is predominantly investors, Mainlanders or otherwise, who continue to prop up demand for residential real estate in Hong Kong.
This has resulted in an overall decline in volumes so far this year. Government statistics showed home transactions stood at less than 20,000 in the first six months of 2016, while 50,000 ~ 60,000 were recorded each year between 2013 and 2015.
And there no longer appears to be a shortage of land supply in Hong Kong, with more auctions by the government planned to allow plenty to come on the market in 2017. Additionally, slower economic conditions may weigh on property prices towards the end of the year, and they may start to slip again at that time.
However, without central banks biting the bullet and putting an end to the massive liquidity that has flooded global real estate markets since the great financial crisis, bubbles are destined to remain the order of the day.