Hong Kong’s residential market has been hit by poor sentiment owing to multiple market headwinds since last year – the protracted US-China trade war, the unprecedented social rest that began in mid-2019, and the Covid-19 outbreak in January 2020. Consequently, the economy has been suffering from a deep recession, with GDP in Q1 2020 contracted sharply by 8.9% YoY, the worst on record, and an increasing unemployment rate to 4.2% in January to March, a record high in a decade. Despite these negative factors, the demand in the housing market is relatively resilient. It has only been deferred due to the virus hit but not disappeared. Entering May, with the epidemic situation in Hong Kong starting to ebb, the local property market is showing signs of recovery with improved sentiment and robust market activity.
While Hong Kong’s COVID-19 situation is improving, we also see the bright spots for the property sector given a combination of favorable factors: historical-low interest rate environment, government’s relaxed mortgage rules, low levels of new completions, and the relatively affordable prices of the recently-launched new projects. Recently, the mass residential market has quickly rebounded with transactions picking up for both the new home sales and secondary market. At the same time, there were some notable transactions in the super-luxury market: a house at Mont Rouge in Kowloon Tong, covering 5,128 sq ft, was sold for HK$350 million or HK$68,253 per sq ft; an odd-numbered house at 1 Shouson Hill Road East in Shouson Hill, covering 2,657 sq ft, was sold for HK$198 million or HK$74,520 per sq ft; a duplex unit at 56 Repulse Bay Road in Repulse Bay, covering 5,076 sq ft, was sold for HK$270 million or HK$53,191 per sq ft. This shows that the investment appetite of some deep-pocketed buyers in the city remains.
The recent improvement in the market activity once again reaffirms that Hong Kong’s property market is resilient and quick to rebound from crisis. Given the spread of COVID-19 in the city is largely contained, homebuyer confidence is being restored. I expect that Hong Kong’s property market will remain stable but in a downtrend momentum for a period of time, and the chances of a sharp fall in prices are unlikely.
Hong Kong has been adversely impacted by mounting market headwinds since the second half of 2019, with the “triple whammy” of a protracted US-China trade war, unprecedented social unrest, and the coronavirus outbreak. Against this backdrop of growing uncertainties and a bearish economic outlook, we see a mixed picture in the luxury residential market. Many buyers have become cautious and adopted a wait-and-see attitude. With home buyer confidence ebbing, we have seen more cases of deposit forfeits in recent months. For instance, in February, a buyer cancelled the transaction of a four-bedroom unit at The Zumurud in Ho Man Tin, forfeiting the deposit of HK$3.5 million; 11 deposit forfeitures totaling nearly HK$15 million were recorded at Sun Hung Kai’s newly launched project, St Martin in Pak Shek Kok in early March.
Conversely, some buyers see this as an opportunity to invest, to try to take advantage of price corrections and willing vendors. There were a handful of notable transactions that help to explain the stable demand prospects especially for the super luxury residential market. One of which was the HK$500 million deal in February of a 3,836 sq ft-detached house in Island View. The recorded unit price was high at HK$130,300 per sq ft. This shows that the investment appetite of some high net-worth individuals (HNWIs) in the city remains. Nevertheless, as the coronavirus has spread worldwide rapidly, it may pose new challenges and in China, the return to economic normalcy has been slow. All these have prompted investors to be more prudent and delay their investment decisions. Fortunately, the general lack of supply of luxury units will render Hong Kong’s luxury homes to be one of the most reliable investments for capital gains in the long term. The SARS experience also tells us that Hong Kong is resilient and quick to rebound. Looking ahead, as market sentiment deteriorates, the luxury residential prices are expected to fall by about 10% in 2020, while the super-luxury residential market will remain relatively stable with a smaller decline.
Thanks to the new housing initiatives that allow first-time buyers to take on bigger loans, announced in the Policy Address 2019, coupled with an interest-rate cut, the residential market has regained some traction amid downbeat market sentiment. According to the Land Registry, overall sales volume in the residential market increased 16% MoM to 4,001 units in October, after falling for two consecutive months. Buyers’ stamp duty increased 2.8 times to HK$880 million, and the number of transactions jumped 1.8 times to 296.
The new policy allows first-time buyers to borrow up to 90% of a property’s value, up to a maximum property value of HK$8 million. The cap for those wanting to borrow 80% of a home’s value will also be increased to HK$10 million, from HK$6 million. This makes more purchasing options available to potential buyers in the housing market. Consequently, we saw demand for small- to medium-sized units rebound.
However, the new policy is likely to deter developers from building micro-flats, as larger flats have become more affordable. Knight Frank expects the once-booming nano-market to taper off, as developers strategically shift away from building nano apartments in their projects in the pipeline.
As Hong Kong officially slipped into a technical recession in the third quarter, the impact of weaker economic activity is being felt across the city, and will linger through the coming year. On top of that, the unprecedented social unrest, which is now in its sixth month, has curbed market sentiment significantly. So even though the relaxation of the mortgage cap for first-time buyers and the lending rate cut provide some support for transaction volume, especially in the second-hand market, the longer term outlook is still negative.
Despite ongoing social unrest and rising concerns about the worsening economy, top-of-the-line residential assets continued to draw interest from high net-worth individuals (HNWIs). In the past couple of months, the market has seen some notable transactions including three houses at Mount Nicholson, two houses at 45 Tai Tam Road and a villa at 90 Repulse Bay Road. We are talking about deals closing at a unit price of over HK$85,000 per sq ft.
Some say that the Mainland HNWIs are retreating from the Hong Kong property market as the trade war worsens. However, at a closer look at the recent sales at Mount Nicholson dispute that. All three houses sold there recently were purchased by the same Mainland investor via different forms of acquisitions, totalling HK$1.78 billion in just two months. One observation is that those currently in the super luxury market are veteran investors who are still interested in Hong Kong. Besides, our research into price correlations revealed that the luxury prices are a lot less sensitive to economic conditions and are proving inelastic.
When we take into account of the downbeat economic sentiment, the weak stock market, and a subsequent, albeit small, price correction in the mass market, we would argue that for a much more stable super luxury market, a price correction would be regarded by some as an entry signal given there has not been many opportunities like this in the past decade.
Even as the political storm in Hong Kong rumbles on, it seems that there is still appetite from super luxury buyers from across the border. London and New York may be favoured the most by HNWIs globally according to Knight Frank’s City Wealth Index, but for Chinese HNWIs, Hong Kong still features strongly.
According to the latest Knight Frank research report, “The Wealth Report Insights”, Hong Kong once again ranks at the top of the world’s luxury residential markets.
Although this is not entirely surprising, the report further highlights the huge gap between the top prices that high net worth individuals (HNWIs) are paying and the average luxury price in Hong Kong (over 450% more).
This gap is wider in Hong Kong than in any other financial hub, such as New York and London. It seems that HNWIs are not afraid of paying top dollar for luxury properties here. Just last month, a Mainland investor with a foreign passport dished out HK$307 million for a duplex unit in Kowloon Tong after paying a stamp duty of over HK$90 million.
This seems to be going against general market sentiment, when some are thinking of moving capital out of the Asian financial hub because of the Sino-US trade dispute and local market uncertainty. However, Knight Frank’s recent study on the correlation between house prices and the Hang Seng Index, itself a barometer of the city’s economy, shows that although mass market prices are closely swayed by the HSI, luxury prices have been growing steadily and evenly over the past 10 years despite many social issues.
This provides private investors with a much clearer crystal ball and therefore a sharper focus about the type of real estate product to invest in. To some private investors, capital value growth stability trumps short-term gains, as Hong Kong’s super prime market shows.
The latest record-setting land sales in the Kai Tai development area are clear signs of developers’ confidence in the future of Hong Kong’s real estate market. On 7 May, a residential plot with GFA of 641,168 sq ft at Hong Kong’s former Kai Tak Airport was sold to a consortium of six developers for a record HK$12.6 billion. And on 15 May, the first seafront commercial plot on the former runway with GFA of 863,000 sq ft was sold for a record land price of HK$11.1 billion.
These major investments by developers show their confidence in a continued increase in Hong Kong’s property prices. This is also consistent with the rebound in housing prices, as property market sentiment has been strong with good sales in new projects.
However, the recent escalation in the China-US trade dispute may cause some developers to be more cautious and adopt a wait-and-see approach, especially for commercial property development, which is capital intensive and has a longer payback period. From a long-term perspective, owing to limited land supply in Hong Kong, land plots with superior locations offering a full view of Victoria Harbour are highly sought after. Knight Frank expects the record-high land prices in the Kai Tak area to boost market confidence and stimulate buyer sentiment, which will continue to fuel a surge in property prices citywide.
Hong Kong ranks one of the world’s top magnets for private wealth in terms of attracting cross border and domestic private capital investment, just after New York and London. It is also one of the top choices to live for the super wealthy according to the Knight Frank City Wealth Index, which measures the attractiveness of cities in terms of wealth growth, investment opportunities, and lifestyle.
These top rankings for Hong Kong
The Hong Kong market experienced a transaction volume and pricing cool in the second half of 2018. This was due in part to external headwinds from a slowed Chinese economy to an unstable Sino-US trade relationship. Despite this, Knight Frank expects the super luxury residential market to remain resilient compared to the mass market. Historically, the luxury market is proven to be less impacted by short term ups and downs in the economy and sentiments.
Piers Brunner is the Chief Executive Officer for Greater China at Knight Frank, one of the world’s leading independent property advisors on commercial and residential markets. Based in Hong Kong and a veteran in the real estate industry with almost 30 years of experience, Piers has a wealth of experience in tenant representation – one of the most crucial growth areas for Knight Frank’s Greater China business.