Growing Pains

August 14, 2009

The Hong Kong luxury residential market is a truly unique mechanism, with its very own market conditions, strengths and limitations. With a dearth of new land on which to build new luxury residential housing, demand outstrips supply when it comes to deluxe property exceeding 2,000 square feet. So while the rich have continued looking for, and buying, plush, luxury accommodation to call their own –therefore pushing up prices – in stark contrast, rising unemployment and wage cuts have weakened demand causing residential rents to be pushed down further.

This divergence in luxury residential market prices and rents has subsequently resulted in yield figures not seen since 2001. The average yield shrunk considerably in the second quarter of this year to 2.96%, while in the same period of 2001 it stood at just over 5%.

KS Koh, founder and Managing Director of Landscope, believes the gap between luxury residential sales and rents will lessen in the next couple of months, with thepace of growth in sales and, conversely decline in rental prices, beginning to stabilise.

“I think next quarter we’ll see sales prices climb but at a more moderate rate than we witnessed in the first half. The market is already feeling a bit of resistance at the current price levels and the negotiation pace has slowed down because clients are not as willing as before to pay the premium that is asked for by sellers,” says Koh. “Rental wise, I think the prices will slide down a bit. But again, I think the pace of decline will be much slower than we saw in the last twelve months.”

So should buyers and renters wait for the market to stabilise? While waiting for the market to even out may bring property speculators hopes of ‘certainty’, it is not advised that you prolong your search, if indeed you are looking to buy. “If you look at the economy, we are, as Obama said, around or near the bottom. So it’s most likely property prices will go up in the next three years – especially luxury properties,” says Koh. By nature, many investors fear buying an asset that has further to depreciate in value, but by waiting for the bottom of the market, they also risk missing out on the best opportunities. These will already have been snapped up by those prepared to take more risks.

“I would say before 1997, anybody that bought property in Hong Kong made a profit. And in most of those years, you would outrun a lot of other investment vehicles. But after 1997, it was a different story,” says Koh. “The great majority of real estate in Hong Kong may not yield more than other investment vehicles, taking into account the risks involved with real estate. There is only one exception, which is luxury residential. And this is mainly because of the permanent shortage of supply.”

Koh believes that there’s a growing trend of people looking for larger residences in Hong Kong. He believes it is this phenomenon that has been pushing luxury residential prices up. As the wealthy in Hong Kong get wealthier and grow in numbers, the supply of luxury properties remains the same; unless that is, the government were to release more land for luxury residential development.

“We have always advocated to clients that if you want to make an investment in real estate in Hong Kong, go for luxury property, go over 2,00 square feet, and hold it,” says Koh. The visionary entrepreneur believes buyers who are going for gold should invest in townhouses on the South Side – which encompasses Repulse Bay, Shouson Hill, Stanley, South Bay, Tai Tam, Chung Hom Kok and Pokfulam – as there is a shortage of town houses available in Hong Kong. “The potential demand for townhouses is huge,” says Koh. “People are always looking to upgrade, so if you’ve been living in an apartment since 2003, your next move will be to a town house. And there are not many new townhouses on the market.”

“The fundamental reason is lack of supply. Everybody knows that on the Peak and the South Side there is no more land the government will release for housing developments. So any new developments will have to come from the re-development of existing houses. So you can see the supply is very much static. There’s no new supply in that area.”

Besides being a desirable area within close proximity of the Central Business District – after all, it’s only a 25 minute drive away – the South Side offers a great deal of advantages for people seeking a family-orientated quality of life. Many of Hong Kong’s best international schools are located on the South Side, as are Hong Kong’s most prestigious private members clubs. And together with a lower population density, conveniently situated amenities, and surrounding trees and sea views, the South Side provides for a superior way of life – for those who can afford it.

So who exactly can afford it? According to Koh, over half of the properties – especially those priced at over HK$100 million – are being bought by Mainland Chinese. “They know the place, and they know where they should go. The favourite places these people will choose are the Peak, Repulse Bay and Mid Levels,” says Koh.

Smart buyers, you say? Well that’s to be decided.

By Naomi Reidy