Hong Kong residential sector sees steeper price falls

Having just returned from Hong Kong, ARA Asset Management’s group CEO, John Lim, senses that he man in the street there is more concerned about job security compared with Singaporeans. His observations have been confirmed by the TNS Gallup International survey released last week, which showed that 84% of people in Hong Kong expect unemployment to increase in 2009 (compared with 78% in Singapore). The percentage who felt that they could join the ranks of the unemployed this year was 35% in Hong Kong versus 30% in Singapore.

Singapore and Hong Kong have seen a dramatic drop in transaction volume of new homes last year, especially in 3Q and 4Q. Singapore’s private new home sales at 4,300 units in 2008 were the lowest since the early 1990s. Hong Kong’s transaction volume in 3Q2008 was at a historical low. However, ARA’s Lim believes that once sentiment recovers, “Hong Kong will bounce back much faster than Singapore”. (ARA has offices in Hong Kong, Singapore, Malaysia and China.) While both markets share similar problems — being export-dependent and financial centres in Asia - the main difference between them is supply.

Hong Kong’s residential market is supported by limited supply over the next two to three years, says Simon Smith, Savills Hong Kong’s deputy managing director and head of research. The strongest support is at the luxury end of the market, where from 2008 to 2010, new supply will be at 178 units a year compared with 1998 to 2007, when there was an average of 446 units a year.

In Singapore, according to CB Richard Ellis (CBRE), about a third of the new private apartments expected to receive temporary occupation permit this year are in the high-end markets of Sentosa Cove, downtown and the traditional prime Orchard Road districts of 9, 10 and 11.

Luxury apartment prices in Hong Kong have also fallen a lot more and faster than in Singapore, reckons Savills’ Smith. Based on his estimates of transactions in the resale market, from peak (in mid-2008) to trough, luxury apartment prices in Hong Kong have dropped 32%, townhouses have fallen 41.1%, and mass-market prices are down 15%. Smith is of the opinion that the bulk of the discounting at the top end has already occurred, and any price falls this year will be less severe. His forecast for 2009 is that townhouse prices will drop a further 5%, luxury apartments by another 10% and mass-market prices will come off between 15% and 20% as the real economy starts to feel the effects of the global financial crisis.
Traditionally, Hong Kong is a market that reacts quickly to news and prices it in very quickly, before moving on again, says Smith. The first two weeks of the New Year saw a flurry of activity mainly in the luxury residential segment. The buyers are typically cash-rich locals, he notes. “We’ve sold a couple of townhouses on The Peak. They rarely come on the market but were suddenly available and at reasonable prices.”

Singapore is a more stable market, and hasn’t yet seen the same extent of price declines as Hong Kong. According to CBRE, prices of new luxury homes have declined 25% y-o-y, from an average of between S$3,200 (RM7,674) psf and S$3,500 psf to an average of $2,400 psf, and the expectation is that private home prices will fall 10% to 15% in 2009, with the luxury end seeing a larger drop.

While property consultants in Singapore have been wary about providing forecasts on price falls this year, there’s been no shortage of estimates from property analysts. Citigroup analyst Wendy Koh is of the opinion that with the mounting job losses and poor economic outlook, private home prices are likely to return to 1998 levels — during the Asian financial crisis. Koh says prices in the mid-end segment have fallen some 20% from their peaks a year ago. She expects that this year, they will drop a further 35% from current levels or around 45% from their peaks in 3Q2007. As for luxury properties, Koh’s estimate is that the price correction this year could be a steep 55% to 60% from their peaks in 2007.

Equally bearish is Goldman Sachs, which in a Jan 13 report estimates that prime residential prices will fall a further 31% by end-2010, with mass-market prices expected to fall 26% over the same period as fundamentals remain weak. With banks tightening credit, Hong Kong home buyers are in the same boat as those in Singapore. Banks’ loan-to-valuation (LTV) ratios are now 60% to 70%, compared with 80% to 90% previously, according to a Citigroup Hong Kong report on Dec 18. Even ARA’s Lim admits that credit is tight. “The quantum of leverage has come down. You used to be able to get 70% to 75%, now it is down to even 50% to 60%.” But for Singapore-listed ARA, which has US$12 billion (RM43 billion) under management and is affiliated with Hong Kong tycoon Li Ka-shing’s Cheung Kong (Holdings), “We generally don’t have a problem when it comes to financing”, he says.