17 February 2003
The Hong Kong market is not a place for the faint-hearted at the moment. Since the beginning of the year some firms have either pulled out or massively scaled back in the region. In Singapore, too, international firms have shut their doors. Gone are the heady days when there was work for every lawyer and his dog. And real estate is no exception. The Hong Kong Special Administrative Region (HKSAR) government has introduced a number of policies to boost the flagging property market; the question is, are they enough to reverse the effects of a lacklustre economy?
Hong Kong continues to be affected by the Asian economic crisis. It has been suffering from persistent deflation problems over the past four years - 13 per cent during the past 50 months to the end of 2002.
The government's solutions for reducing an unacceptably high fiscal deficit of HK$60bn (£4.73bn) include encouraging trade between Hong Kong and the Pearl River Delta, increasing taxes (on salaries and profits), and reducing the number and costs of civil servants. The first of these has caused some wry comment from the myriad of Hong Kong businesses moving their manufacturing operations to the People's Republic of China over the past two decades. A sales tax does not appear to be on the cards, but the Hong Kong Financial Secretary has yet to spell out specific fiscal measures, so it cannot be ruled out completely.
The economy is forecast to continue on the path to recovery, albeit at a slow pace. A 3 per cent gross domestic product growth is generally expected by private organisations, while the World Bank Group predicts 2.7 per cent. The Asian Development Bank adjusted its forecast from 4.8 per cent in April 2002 to 3.5 per cent in September.
Tourism is one of the few sectors that registered growth amid the present economic downturn. Visitor arrivals during the first nine months of 2002 surged by 16 per cent to 11.7 million from the same period in 2001.
Besides tourism, logistics will be another development focus of the HKSAR in 2003. Hong Kong International Airport's logistics centre and express cargo terminal will be facilitated, while a modern logistics park will also be built on North Lantau Island.
Office property market
The office leasing market was patchy. The majority of transactions were relocations from grade-A offices in core areas to cost-effective grade-A offices in fringe areas, such as North Point, Quarry Bay and Sheung Wan. Tenants are more inclined to renew leases to avoid relocation costs, especially where landlords have been willing to cut rentals and become more flexible on rent-free periods, length of lease and fit-out subsidies to retain existing occupiers.
Office buying sentiment has also continued to pick up during the first half of 2002 since the 11 September attack. But the lack of significant economic boosters failed to sustain the positive atmosphere, resulting in a sluggish sales performance in the second half. The volume of sale completions remained low amid limited supply and scarce demand from end-users, with no major company expansions or foreign companies entering the market.
Yields of offices were stable at 4-5 per cent for grade-A and 8-9 per cent for grade-B properties respectively - similar to those in 2001.
With the release of more than three million square feet of new grade-A business space in 2003, analysts are predicting that the large amount of supply and continuing low level of demand will result in a surplus and high vacancy rates, and ultimately in another 20 per cent reduction in overall rentals throughout 2003.
Capital values of office properties are expected to remain stable in the first half of 2003, but with a low level of transactions during the period. While foreign investors will continue to search for prime grade-A office properties, local investors' interest in high-yielding grade-B buildings is expected to continue in 2003.
Residential property market
The luxury residential leasing market picked up throughout 2002, with consistent demand from expatriates and landlords continuing to launch new units throughout the year, reflecting increasing confidence.
Leasing activity was boosted by the government's new housing policies in November and a number of new luxury homes were launched for lease in 2002. Certain planned sales developments were switched to leasing because of low sales prices, while the reservation of new units for lease was also common. Buying activity improved until the market stabilised in October. A number of luxury sales units were switched to leasing, especially during the summer peak season, but there was still a constant and considerable amount of primary supply throughout the year, in October particularly. A number of secondary homes were also put up for tender.
The effect of the government's mass residential property market rescue policies will be seen in 2003; transaction volumes in the primary luxury sector is expected to benefit from any purchasing atmosphere. Most purchases will be for owner-occupation purposes. Lingering uncertainties in both the local and global economies are likely to dampen investment sentiment and lead to fluctuating market performance. More transactions of units over HK$10m (£788,000) are expected in 2003, even though the prices are expected to remain stable, especially of primary units, owing to the increasing surplus over the year.
Mass residential sales seemed to have begun to recover as a result of a combination of the government rates concession, up to HK$5,000 (£394), the stabilised unemployment situation, prices reportedly being perceived to be near the bottom, and the mass residential market rescue policies announced in November. These policies included the announcement of the cancellation of the Home Ownership Scheme in April 2003, relaxation of rules on property financing and changes in housing policies. The government's nine mass residential property market boosting policies are seen as stabilisers rather than having the aim (as stated by the government) of "slightly pushing up residential prices".
With plenty of new supply and unabsorbed units, both primary and secondary mass residential prices will still be under downward pressure in 2003. Most new homes are expected to be launched at entry-level prices, while unsold stock is also predicted to be cleared by price discounts or generous packages from developers. This could further suppress secondary sales, especially in areas where there is sufficient primary supply. Sales, however, are not expected to be pushed up significantly. Local economic problems and the anticipated increase in salaries tax are expected to restrain the pace of market recovery.
Whether or not the HKSAR government's policies can help give a boost to the Hong Kong property market, both the residential and office property markets will undoubtedly be continually affected by the deflation problems until we see good signs of economy recovery in Asia or globally.
Simon Reid-Kay is a partner in the real estate group at Allen & Overy Hong Kong