Owners in secondary market are ditching rent strategy and switching to sell

Rent will still be under pressure.

It has been noted that rental market, a better reflection of end user demand, had been coming down for four months and reported a 3.1% MoM drop in October 2015, the largest monthly decline since the global financial crisis.

According to a research note from Credit Suisse, further, for the first 11 months, residential rents dropped 1.4% YoY. Credit Suisse expects more rental corrections to come given that around 4,700 units turned keys in 4Q15. Also, approximately 17,600 units are scheduled for completion in 2016.

The secondary market is quiet due to which owners are switching from sell to rent, and thus rents should continue to come under pressure. Lastly, higher completion falling through from rising land supply over the past few years.

Here's more from Credit Suisse:

As a result, rental is becoming cheaper than buying in certain housing estates, especially the mid-end projects in the New Territories where the bulk of the new supply will be. Properties with a price tag of over HK$10 mn look to be more resilient at this stage due to a high down-payment ratio requirement and more limited supply in the primary market.

We have selected 80 samples of housing estates across 18 districts in Hong Kong. Our findings show that 31% of our sample is cheaper to rent than to buy and this could increase to 69% if rates go up by 25 bp and rents come down by 5%, a highly possible scenario in our view.

Rental yields for around 3.3-3.5% and sub-2% for luxury properties. Without capital appreciation, the returns are hardly enticing, particularly in a rising interest rate environment. Investors can easily find assets which offer similar, if not higher recurring income return such as dividends from shares and RMB deposits.