The great unknown in the current property equation in Hong Kong is how the global credit crisis will continue to unfold and impact on the local market. Already we have witnessed layoffs in the local financial sector and talk that more might follow; similar revenue-saving concerns emerging in the logistics and shipping sector; mortgage rates edging upwards; imported inflation; and a growing awareness of the disparity between the haves and have-nots.
And, there is a debate under way about the shape and nature of the Hong Kong economy going forward and whether the current value-added service delivery model is sustainable in the long term.
More particularly how does Hong Kong ensure that it remains relevant and competitive in the very different world which we will find ourselves in the years ahead?
As for the property sector, the good news is that we are in far better shape than in 1997.
But the more troubling issue is that sentiment and confidence are weak and there is a perception based on the major corrections that we are seeing overseas that the Hong Kong market faces a similar large downward adjustment.
Corrections there undoubtedly will be. But it is important to appreciate that this will be driven not by any major change in the fundamentals in Hong Kong but by the volatility and restructuring that is taking place around us.
In Hong Kong, property supply remains tight with fewer than 11,000 new units likely to be completed this year and fewer than 12,000 next year, while last year over 19,000 new units were bought as against the 10,500 completed, thereby mopping up some of the existing unsold supply.
So any correction will not be supply driven as there is no excess supply. Volumes may be down, and prices off 10 per cent from their peak, but transactions are still averaging 5,000 to 6,000 units a month indicating that there are still many who believe in the long-term future of the residential sector.
Homeowners in Hong Kong are generally debt averse and more than 50 per cent of households have shed any mortgage liability that they may have had, with the average tenure of those remaining mortgages estimated not to exceed six years.
The government, it could also be argued, has exercised prudence by adhering to the application list system and not embarking on its own sales and tender programme.
The pipeline has not entirely dried up as developers continue to modify leases and MTR Corp and the Urban Renewal Authority announce major projects linked to infrastructure provision or regeneration proposals, but this supply chain is carefully orchestrated and monitored by government behind the scenes.
Mortgage rates have been increased recently by most banks to 3.25 per cent but even if we were to see one or two more such increases they would impact sentiment rather than affordability. The challenge then is how does government manage sentiment and perception going forward in that it has to be for government to shoulder the responsibility?
The government essentially controls the market through land supply policy, lease modification procedures, shaping the outcomes of our planning process, sanctioning infrastructure development and encouraging urban renewal.
Now they must step up to the plate. With control comes accountability and there needs to be a well articulated and soundly based series of briefings and presentations at which senior ministers underline the fundamentals and manage the downturn.
A managed downturn could result in adjustments of the order of 15 to 20 per cent in addition to what we have already seen but the residential sector is on the cusp and it would not be difficult for it to fall off the cliff and enter a downward spiral if pessimism prevails.
The above comments apply, of course, primarily to the mass residential market and I expect we will see larger corrections in the luxury sector - units of over 150 square metres - which in fact represents only 3 per cent of our total stock but generate all the headlines and receive much of the media attention.
Here many units are in the hands of traders and speculators who, I believe, will choose to exit as the going gets tougher, resulting in a stepped but steep correction, particularly in units purchased in the last two to three years.
On the office front the correction has been under way since the beginning of the year, particularly in decentralised locations where asking rents have been reset at 15 to 20 per cent below previous levels.
Concerns about jobs and the economy will merely accelerate this process and we will also see some weakening in Central where to date the “loyalty factor” has underpinned rental levels.
However, with the restructuring of the financial sector, many financial institutions now have space which is surplus to their requirements and we are already seeing emergence of a “grey space” market as these institutions seek to sub-let at rents which do not necessarily match their carrying costs as their prime objective is to mitigate the ongoing liability.
I think to deny the pending correction would be foolish but I believe that the fundamentals are such that they justify the adoption of a pragmatic approach and I remain sanguine about the outcome.
Nicholas Brooke is the chairman of Professional Property Services Group
1 comment:
For Now, It’s All Sentiment
Nicholas Brooke
8 October 2008
The great unknown in the current property equation in Hong Kong is how the global credit crisis will continue to unfold and impact on the local market. Already we have witnessed layoffs in the local financial sector and talk that more might follow; similar revenue-saving concerns emerging in the logistics and shipping sector; mortgage rates edging upwards; imported inflation; and a growing awareness of the disparity between the haves and have-nots.
And, there is a debate under way about the shape and nature of the Hong Kong economy going forward and whether the current value-added service delivery model is sustainable in the long term.
More particularly how does Hong Kong ensure that it remains relevant and competitive in the very different world which we will find ourselves in the years ahead?
As for the property sector, the good news is that we are in far better shape than in 1997.
But the more troubling issue is that sentiment and confidence are weak and there is a perception based on the major corrections that we are seeing overseas that the Hong Kong market faces a similar large downward adjustment.
Corrections there undoubtedly will be. But it is important to appreciate that this will be driven not by any major change in the fundamentals in Hong Kong but by the volatility and restructuring that is taking place around us.
In Hong Kong, property supply remains tight with fewer than 11,000 new units likely to be completed this year and fewer than 12,000 next year, while last year over 19,000 new units were bought as against the 10,500 completed, thereby mopping up some of the existing unsold supply.
So any correction will not be supply driven as there is no excess supply. Volumes may be down, and prices off 10 per cent from their peak, but transactions are still averaging 5,000 to 6,000 units a month indicating that there are still many who believe in the long-term future of the residential sector.
Homeowners in Hong Kong are generally debt averse and more than 50 per cent of households have shed any mortgage liability that they may have had, with the average tenure of those remaining mortgages estimated not to exceed six years.
The government, it could also be argued, has exercised prudence by adhering to the application list system and not embarking on its own sales and tender programme.
The pipeline has not entirely dried up as developers continue to modify leases and MTR Corp and the Urban Renewal Authority announce major projects linked to infrastructure provision or regeneration proposals, but this supply chain is carefully orchestrated and monitored by government behind the scenes.
Mortgage rates have been increased recently by most banks to 3.25 per cent but even if we were to see one or two more such increases they would impact sentiment rather than affordability. The challenge then is how does government manage sentiment and perception going forward in that it has to be for government to shoulder the responsibility?
The government essentially controls the market through land supply policy, lease modification procedures, shaping the outcomes of our planning process, sanctioning infrastructure development and encouraging urban renewal.
Now they must step up to the plate. With control comes accountability and there needs to be a well articulated and soundly based series of briefings and presentations at which senior ministers underline the fundamentals and manage the downturn.
A managed downturn could result in adjustments of the order of 15 to 20 per cent in addition to what we have already seen but the residential sector is on the cusp and it would not be difficult for it to fall off the cliff and enter a downward spiral if pessimism prevails.
The above comments apply, of course, primarily to the mass residential market and I expect we will see larger corrections in the luxury sector - units of over 150 square metres - which in fact represents only 3 per cent of our total stock but generate all the headlines and receive much of the media attention.
Here many units are in the hands of traders and speculators who, I believe, will choose to exit as the going gets tougher, resulting in a stepped but steep correction, particularly in units purchased in the last two to three years.
On the office front the correction has been under way since the beginning of the year, particularly in decentralised locations where asking rents have been reset at 15 to 20 per cent below previous levels.
Concerns about jobs and the economy will merely accelerate this process and we will also see some weakening in Central where to date the “loyalty factor” has underpinned rental levels.
However, with the restructuring of the financial sector, many financial institutions now have space which is surplus to their requirements and we are already seeing emergence of a “grey space” market as these institutions seek to sub-let at rents which do not necessarily match their carrying costs as their prime objective is to mitigate the ongoing liability.
I think to deny the pending correction would be foolish but I believe that the fundamentals are such that they justify the adoption of a pragmatic approach and I remain sanguine about the outcome.
Nicholas Brooke is the chairman of Professional Property Services Group
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