Slow residential market sales in Hong Kong indicates coming downside risks

Research shows projection of luxury residential prices to fall by 13% and rentals to decrease by 3% over the next twelve months.

The Hong Kong’s residential market experienced a notable slowdown in 3Q 2011 with decline in sales activity and slowdown in price growth, according to Colliers International’s Hong Kong Residential Market Research & Forecast Report.

Over the three-month period ending August 2011, the total number of sales and purchases of residential units fell 28.9% quarter-on-quarter (QoQ). Meanwhile, the luxury segment experienced a sharper deceleration, with the number of luxury residential sales transactions valued at over HK$20 million in the traditional luxury districts – the Peak, South Side and Mid-Levels – dropped by 48% QoQ significantly.

“The slowdown in residential sales activity largely falls back on policy risks, availability of credit and interest rate hikes,” said Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International. “Together with general concern on the global economic growth ahead, the new round of mortgage rate hikes further dampened market sentiment and prompted potential buyers to adopt a wait-and-see attitude.”

In terms of financing, major local banks raised their mortgage rates during 3Q 2011. Having said that, this simply means that mortgage rates are starting to reflect back what it was before at an average of 3% to 4% over the past decade.

Meanwhile, signs of broader investor caution are observed with tighter credit conditions in Mainland China as reflected by the softened demand from Mainland Chinese buyers for properties in Hong Kong. In 2Q 2011, the proportion of Mainland Chinese buyers for properties in Hong Kong was at 30%-40% however, this dropped to 20% in 3Q 2011.

Amidst subdued buying sentiment and consequently slow sales activity, the growth of luxury residential prices tapered off significantly in 3Q 2011. It registered a marginal growth of 0.6%QoQ only to HK$19,629 per sq ft as of August 2011, compared to 3.8%QoQ rise in May 2011.

On the luxury residential leasing front, the market continued to experience sustainable occupation demand, with a larger proportion of expatriate arrivals from non-finance companies, such as insurance, IT and manufacturing enterprises. The demand-supply imbalance coupled with inflationary pressure continue to drive rents upwards, but several corporate landlords became more negotiable on rents in the wake of increasing downside risks in the global economic environment. This coincides with the slowdown in rental growth in 3Q 2011.

As of August 2011, the average luxury residential rents edged up by 2.3% QoQ to HK$48.37 per sq ft per month, following 4.2%QoQ increase in May 2011. With rental growth rate outpacing that of prices, overall luxury residential yield in the three traditional luxury residential districts increased from 2.72% p.a. in May 2011 to 2.77% p.a. in August 2011.

Looking forward against a weak global economic backdrop and tightened credit conditions in mainland China, together with mortgage rate hikes in Hong Kong, the local luxury residential sales market is likely to see downside risks.

According to Colliers International, the overall luxury residential prices are projected to see a decline of 13% in the next twelve months. Meanwhile, the weakening global economic growth is also expected to leave its mark on the residential leasing demand in Hong Kong, in view of a hold back in the flow of expatriates from various industries. Over the next twelve months, the average luxury residential rent is projected to fall by a mild 3%.