10 March, 2011
Global real estate services firm, DTZ today updated the performance of the Hong Kong residential and property investment markets in Q1 2011, showing that the speculative elements of the residential market were reined in by the cooling policies and the market continued to thrive in terms of both transaction volume and price on the back of solid economic development. With the influence of seasonal factors, the investment market had a steady performance. Investors’ interest could be seen in commercial properties and this quarter there was a record breaking transaction in the retail sector.
Under the influence of the cooling measures of the government, the number of Agreements for Sales and Purchase (S&Ps) dropped by a larger margin from 12,024 in December 2010 to 10,147 in January 2011. In February, the figure rebounded to 12,617 as sales were better than expected during the traditional low season of the pre-Chinese New Year period. Between April 2009 and February 2011, the monthly number of S&Ps had been above 10,000 for 23 months. Home sales looked set to reach 13,000 S&Ps in March on the back of the positive market sentiment.
Mr Alva To, DTZ’s Head of Consulting, Greater China, commented, “The policy impact was shown in the sudden drop in sales volume in December, which was reflected by the January S&P figure. After a quick rein in on speculation, short-term speculators and buyers of tight funding were left out. As a result, the market is now largely supported by real demand from end-users and long-term investors, which will contribute to a healthier development of the market. Based on this observation, there is reason to believe the March S&P figure would surpass that of February, giving rise to an estimated 35,764 S&Ps for Q1 2011. This would be the third highest Q1 transaction record since 1998, after that of 2008 and 2010.”
Not only had the transaction volume rose in recent weeks, home prices also climbed to a significant level. The average unit price of Taikoo Shing rose a significant 8% month-on-month in February 2011 to HKD9,500 per sq ft, and the increase was matched by the mass residential overall at 8.5%. From February 2010 to February 2011, the average price of a Taikoo Shing flat had risen by 20.3% while the general mass residential rose further by 22.3%. Mr To said, “The unit price of Taikoo Shing has surpassed the historical peak in 1997 and 2008, and the remarkable rise in price is a general trend observed for mass residential in Hong Kong.”
For luxury residential the increase in price was more prominent. The unit price of luxury projects like Leighton Hill gained 4.3% monthly to HKD24,000 per sq ft in February 2011, while the overall luxury unit price gained 6.3% monthly. Over the 12 months from February 2010, the unit price of Leighton Hill rose 20% while the overall luxury residential rose 25.8%. Mr To said, “Buyers and investors remained interested in luxury residential which more often outperform the mass residential in a boom market.”
Mr To pointed out that several positive factors continued to support the development of the residential market. “A strong economic growth, strong export figures, a falling unemployment rate, these are economic fundamentals favourable to the residential market. A limited supply of housing, which the government has addressed through the allocation of more residential sites in the pipeline, helped support the home price before housing units projected in the land sale programme are completed and launched. The influx of mainland Chinese funding to the Hong Kong residential market constitutes an important part of the demand for local homes. As long as Hong Kong remains an open economy and an international market at the doorstep of mainland China, the influx is likely to continue in the foreseeable future,” commented Mr To.
However, Mr To observed that change in interest rate is likely to be the greatest uncertainty to the outlook of the residential market. “An abnormally low interest rate that eases the burden of mortgage payment has been one factor behind the boom of the local residential market. However, the prospect of interest rate hikes in the US and Europe has been recently highlighted by the Hong Kong Monetary Authority. This can be seen as a reminder that market sentiment could be tied to changes in interest rate. Right now, as home price roses, the affordability ratio is climbing. In the case of a 70% mortgage of 20-year term for a residential unit costing HKD5 million, homes with a rental yield below 4% already have negative cash flow. Any interest rates rise would affect the cash flow situation more. Amid the many favourable factors, the movement of interest rate is the biggest concern towards the development of the residential market in the near future.”
“Given the volatility of stocks, funds and commodities, residential is still seen as the preferred investment tool of many. In the lack of more desirable forms of investment, it is not unusual that capital flocks to properties. Fuelled by an ultra-low interest rate, home price sees support and it is not likely to be changed under conventional market conditions. In the absence of negative factors that could curb the development of the residential market in the near future, we maintain a positive view on the outlook of the market, although interest rate hikes could by far prove to be the greatest variable to the market sentiment,” commented Mr To.
Unlike the residential market, the property investment market was comparatively quieter in the run up to the Chinese New Year, recording 39 major deals (each with a unit value of more than HKD100 million) and notching a total consideration of around HKD9.6 billion as of 7 March 2011. For the entire Q1, the number of major deals completed is expected to be 50, down 41% from Q4 2010’s record at 85 major deals.
Looking back on the transactions of 2010, the property investment market recovered readily since the second half of 2010, driving up the volume of transaction for the whole year to 302 major deals, an increase of 33.6% from 2009. The total considerations of these 302 deals amounted to HKD92 billion which is up a swooping 78% from the total considerations of 2009. Mr Yip commented, “After remarkable market performances in 1997 and 2007, the property investment market reached a new peak in 2010 with the largest number of major deals ever. Sales in all sectors generated a larger consideration compared with 2009.”
The proportion of luxury residential and office transactions has been stable throughout 2009 and 2010, but it can be seen that the considerations involved in office transactions during last year was more than double that of 2009. Mr Yip said, “Where strata office transactions were the majority in 2009, there were more important en-bloc office transactions in 2010, which boosted the total considerations for the office sector in the year to close to HKD34.3 billion, or 37% of the total considerations of HKD92 billion. This shows that investors preferred the office sector for a better yield prospect.”
Retail was also favoured by investors in 2010 as its proportion of transaction volume raised slightly from 24% to 25%. In terms of considerations, retail properties sold last year were worth HKD16.3 billion, an increase of 43.8% over the total value sold in 2009. “From the performance of the office and retail sectors, we can see that investors are increasingly looking to commercial properties as they prowl the market for prime investment opportunities. Given positive economic development, sound business and occupier demand, and a market relatively free from government intervention, it is expected that investors’ preference for commercial properties will continue in 2011,” said Mr Yip.
Turning to the first quarter as of 7 March 2011, the market was dominated by luxury residential, which is a staple for investors. There were fewer office transactions (seven major deals compared with 33 in Q4 2010), and the total considerations of HKD1.97 billion fell short of the HKD11.5 billion by a large margin. Mr Yip commented, “Seasonal factor cast a prominent effect on the office transactions in Q1 2011 in the forms of less supply in the market and fewer buying activities in the period leading up to the Chinese New Year. Moreover, because of a rapid surge in price for office properties, investors have been more cautious in buying during this quarter which also led to fewer transactions.”
Retail transactions notched a significant 17% of the total considerations in Q1 2011 at close to HKD1.6 billion. A major deal of retail in Causeway Bay with a unit price of HKD633,333 per sq ft broke the record of retail deals in Hong Kong and became the highlight in this quarter. Mr Yip noted, “Despite the quieter start of the year for commercial property transactions, the trend that appeared in 2010 looks set to continue in 2011, which is hinted at by good performance in the retail sector. Because of strong growth in consumption and tourist spending, it is expected that transactions of retail and other commercial properties will increase more readily after the first quarter.”
Over the past few years Mr Yip noted that Mainland investors and funds made up a stable part of investment demand, but nonetheless it is still domestic investors that dominate the market. “Mainland investors have been largely interested in residential properties but recently they began to look at the commercial sectors as well. With greater accessibility to information and without the difficulty of transferring money, domestic investors often seize the buying opportunity quicker and thus have a leading edge in clinching deals, and we expect the trend to continue this year,” concluded Mr Yip.