Supply curve is shifting out for Hong Kong private housing

Developers to prioritize volume over margins.

The Hong Kong Government has just released the Q2 2014 Statistics on Private Housing

Supply in Primary Market, and amid this development, it has been observed that on an overall basis, the Hong Kong Government estimates total private housing supply at 73,000 units as at end-June 2014.

According to a research report from Barclays, this is up 1,000 units compared to the 72,000 units in March 2014.

In nominal terms, these 73,000 units also match the highest level of private housing supply since the government began to release this quarterly data.

Meanwhile, the report also said that overall, although the market still has periodic doubts over the government’s ability to deliver on its goal of building 470,000 homes over the next 10 years, Barclays believes the government’s commitment remains clear.

Land and housing supply is on the rise. As the government continues to make more land available, and at lower land prices, Barclays expects developers to focus on volume rather than margins.

Here's more from Barclays:

Developers with a ready-for-sale pipeline and high embedded margin should have more sales flexibility.

Combining this with current valuations, we prefer Cheung Kong and Hang Lung Properties, our only two OW-rated Hong Kong developers.

On an overall basis, the Hong Kong Government estimates total private housing supply at 73,000 units as at end-June 2014.

This is up 1,000 units compared to the 72,000 units in March 2014.

In nominal terms, these 73,000 units also match the highest level of private housing supply since the government began to release this quarterly data.

The last time that private housing supply reached 73,000 units was in Q3 2006 and Q4 2004.

While primary housing sales have benefited from talks of policy easing (i.e. 1 April 2014 “no longer overheating” comment from the Chief Executive and the fine-tuning of the Double Stamp Duty), overall net supply has continued to rise as the government remains committed to increasing long-term land supply.

If we were to express the current private housing supply in the context of the current quarter’s monthly primary sales rate (absorption rate), considering that developers sold 3,281 units in Q2 2014, the 73,000 unit supply implies 67 months of stock being held by developers.

With the equivalent of 5.6 years of supply against the just-in-time level of 4.2 years to take a project from start to completion, we believe it is little wonder that developers continue to prioritize volume over margins in their new launches.