Hong Kong residential and investment markets review Q4 2010

14 December, 2010

International property adviser DTZ revealed today that the market sentiment was becoming cautious amid a tough round of government measures against speculation, which looked set to drive down transaction volume for both the residential and property investment markets towards the end of 2010, but the measures have yet to cause a major drop in property price. Although policy effects might slow down purchases in the short term, the local property market still expects a stable outlook underpinned by strong economic fundamentals and the continual interest in property investment, especially the office sector, of both local and foreign investors.

Looking back to the first two quarters of 2010, the quarterly sales volumes were relatively stable at around 39,000 Agreements for Sales and Purchase (S&Ps). Beginning in Q3, after a series of record land sales that encouraged further price growth, sales volume jumped to 46,267 S&Ps. Following the peak record of this year in August at 17,157 S&Ps, sales fell back by 18.4% in September to 14,006 S&Ps. Q4 continued the correction, with October’s volume standing at 12,352 S&Ps, down 11.8% month-on-month.

However, November’s sales figure bounced back to 16,235 S&Ps on the basis of positive economic development. This made for the second highest November record since 1998, only after 2007’s record at 18,319 S&Ps. Between April 2009 and November 2010, the monthly number of S&Ps had been above 10,000 for 20 months. 

Mr Alva To, DTZ’s Head of Consulting, Greater China, commented: “As the sales volumes of the first 11 months of 2010 show, there is a solid demand for homes. We expect December’s sales volume would be under the influence of the year-end factor but would still stay around 10,000, bringing Q4 2010 to close at an estimated 38,587 S&Ps, while the policy effect may be shown to a fuller extent in January or February 2011, when we expect sales drop to around 8,000. Nevertheless, at an estimated number of S&Ps of 163,503 for the entire 2010, this year's total home transaction volume represented a rise of 20% from the volume of 2009.

Turning to prices, mass home prices had been rising since the trough as of December 2008, with two apparent corrections in November 2009 and May 2010. In face of the recent government measures, home prices began to show signs of softening and cancelled the gain made in October. For example, the average unit price of Taikoo Shing rose 1.8% month-on-month in October 2010 to HKD8,500 per sq ft, before coming down 1.8% to HKD8,350 per sq ft in November. Despite this, the DTZ mass home index showed a price gain of 13.0% in the first 11 months of 2010, signifying a rise for mass residential in general over the year. On the other hand, the unit price of luxury projects like Leighton Hill had gained 3.2% monthly to HKD22,500 per sq ft in October 2010, then came down 2.2% to HKD22,000 per sq ft in November. Between January and November 2010, the DTZ luxury home index gained at a larger margin than that of mass residential at 16.4%, showing that luxury homes again outperformed mass homes in price rise.

Mr To said: “The solid demand for residential properties was fuelled by persistently ultra-low interest rates and ample liquidity. But the exuberance of the residential market also prompted the government to put some gauge on the speculation element, and on the in-flow of hot money arising from the quantitative easing policy launched in major economies. After a sharp rise in price in the summer, the government was determined to tackle the issue of property bubble through a series of measures, including the Special Stamp Duty and tightened mortgage loans.

Mr To cited that two major rounds of anti-speculation measures launched by the government in the 1990s had caused the prices to drop to some extent. “Policies had a short and immediate impact on the market sentiment, the transaction volume and price. For example, following the launch of anti-speculation measures and lowering of mortgage ceiling in 1991, home prices dropped 4.3% from July to December 1992; in 1994 another round of anti-speculation measures were rolled out, causing the home prices to drop 24% from March 1994 to September 1995. However, because of sound economic fundamentals during the 1990s, home prices began to rebound after the policy effects subsided.

In regard to the current round of measures, Mr To commented: “Market sentiment began to change recently. Mass home price started to show signs of softening in November as some sellers offered a more realistic asking price. Luxury residential is also subject to the impact of fewer transactions, although the price is still supported by a very limited supply.

However, there are other factors calling for attention, such as the fact that a low interest rate eases the burden of mortgage payment, and the ample liquidity is lacking investment opportunities. Together with sound economic fundamentals, these factors may dilute the effects brought by the government measures.

On economic fundamentals, Mr To pointed out that improvement in retails sales and salary are crucial in supporting the development of the residential market. “Take a look at the retail sales figures recently released by the Census & Statistics Department. Total retail sales in the first 10 months of 2010 increased 18.3% in value or 15.5% in volume year-on-year. The sustained robust sales are reflective of the firm consumer sentiment as well as vibrant tourist spending. Job and income prospects have also improved, according to a recent survey by the Hong Kong Institute of Human Resource Management, which shows that the average base-pay increased by 1.9% in 2010. Hong Kong’s economic recovery since the second half of 2008 had been witnessed by a reduced unemployment rate and a vibrant labour market.

Transaction volume may fall in the short term by 40% to 50% due to the strengthened wait-and-see attitude of potential buyers, and also due to seasonal factors as we approach year-end and holidays, when transactions tend to be quiet. But as shown previously, there is an underlying pent-up demand for homes which is supported by the sound fundamentals and the need to hedge against inflation through real estate.

Home prices are forecast to fall by 10% in the near term under the current development. At the same time, it is expected that end-users will seize the opportunity to purchase when prices begin to fall, as long as the improving economic trends continue. However, the ultimate direction of the market will depend on the government’s attitude as we move on to 2011,” concluded Mr To on the residential market trends.

On the other hand, in Q4 the property investment market recorded a total of 63 major deals (each with a unit value of more than HKD100 million) as of 7 December 2010. For the entire Q4, the number of major deals completed is expected to be 70, down 21.3% from Q3’s record at 89 major deals and 23.9% from a year ago.

Mr Alvin Yip, DTZ’s Co-Head of Investment, China, said: “The number of major transactions was relatively stable during the first half of 2010, hovering around 60, before jumping to 89 in Q3 on the basis of a positive market outlook and solid economic support. But the recent government measures and tightened loans affected buyers’ appetite towards luxury residential to a certain extent, which is a major reason the transaction volume in Q4 did not continue the robustness seen in Q3. Still, 2010 has been largely characterised by the sales of office properties which led the transaction volume and considerations. Of 278 deals notched this year (as at 7 December 2010), 80 transactions (28.8%) involved office properties with a total consideration of HKD33.519 billion, outnumbering the 78 transactions of luxury residential, which came in second and involved a consideration of HKD16.193 billion. This shows that investors increasingly looked to the office sector for a better yield prospect.

Compared with Q3 2010 when office properties accounted for 33% in volume and 42% in consideration, the share of investment in this sector rose further in Q4 to 48% in volume and 61.2% in consideration. Mr Yip commented: “Office has replaced luxury residential as the most popular choice of properties for investors since Q3 this year. A continued positive outlook of rental growth spurred by positive economic development made the office sector attractive to many investors as they looked for value-added investment opportunities. Office is expected to remain popular among investors as it has a better yield prospect over retail, its price gain has lagged behind luxury residential, and most of all it is subject to fewer regulations and market fluctuations.

On luxury residential, which has long been a favourite of investors, Mr Yip pointed out that in recent months the share of luxury residential transactions shrank from 26% in Q3 to 17% in Q4, after office and retail. In terms of considerations, the share shrank quarterly from 17% to 9.8%, again after office and retail. “The increasing limitations imposed on luxury home transactions were driving some investors away to other property sectors or even other forms of investment, which led to an overall drop in transaction volumes and value in Q4,” said Mr Yip. For sites, transactions in Q4 had a smaller share in the overall number and value from Q3, which reflected that investors had become more cautious of the purchase prospect of residential, according to Mr Yip.

Mr Yip pointed out further factors related to the sales of luxury residential. “Since the government temporarily removed real estate from the investment asset classes under the Capital Investment Entrant Scheme for the next three years starting from October 2010, we expect that would have an impact on luxury home transactions. However, the scale of such impact would be limited. Taking the capital from mainland China, for example, the austerity measures being rolled out across China’s major markets and the prospect of renminbi appreciation are driving the in-flow of money to Hong Kong, where most Mainland corporations have established business links. These drives will continue to feed the demand for local investment properties,” said Mr Yip.

As most western markets are still on the long road to recovery, foreign capital continued to focus on Hong Kong’s vibrant property market in Q4, as the Financial Secretary recently made clear that the flow of foreign capital to the local market would not be hindered. Meanwhile, local investors still dominated the market in Q4 (92%), and they are likely to remain alert of investment opportunities that give rise to steady returns. Looking into 2011, office properties have the best outlook among all sectors because of a sound forecast in occupier demand and rental growth,” concluded Mr Yip.

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