In recent years, Hong Kong real estate has become so popular among buyers that its prices have shot up in line with its stunning skyline. By many markers, it’s the world’s most expensive property industry. The strong pull of the market, however, has also seen it push buyers away.

Led by its concern for a potential bubble, the government stepped up cooling measures in 2012, including lowering the loan-to-value ratio on non-resident mortgages. It lowered it again last year to around 40-50 per cent, depending on the property. This, together with a higher stamp duty for foreigners (15 per cent), finally saw prices drop, and rather significantly in some areas. 

Still, the luxury market has been resilient, and several new construction projects continue to provide options for investors in a constantly expanding city. These three factors are largely shaping Hong Kong property right now.

Appetite for luxury

While residential sales in Hong Kong have hit their lowest level in decades, it appears that the luxury property market is holding firm. For example, both sales and supply levels have been steady across much of the city, going by the most recent figures from property consultancy, Savills.

The super luxury segment should prove even more immune to the current market downturn, especially given the lack of stock and the number of “ultra-high net worth” individuals looking for additional properties, according to Savills.

“We may see further record-breaking deals concluded this year if similar prime products are made available to the market,” says Savills.

Ongoing building

There are also several major infrastructure developments in Hong Kong. These include the high-speed rail station at West Kowloon, the South Island line linking the southern part of Hong Kong Island to the CBD, the extensive Shatin Central link, and the Hong Kong Macau Zhuhai Bridge.

“Kowloon East will transform from an industrial district to a second CBD in Hong Kong and the Hong Kong Airport Authority is also going to build the third runway system to accommodate the increasing traffic,” says Colliers’ executive director, valuation and advisory services in Asia, Vincent Cheung. “A new commercial district will be developed next to the existing Asia Expo at the airport.”

These projects are scheduled to complete at various points between 2017 and 2030.

Construction doesn’t come cheaply, however, and costs have been on the rise over the past few years, says research analyst at Jones Lang LaSalle in Hong Kong, Ryan Ip. He says that for mass and medium residential projects, the price is now around HKD$4,500 per square foot (psf) to HKD$5,000 psf, but can be more than HKD$6,000 psf for luxury residential buildings. 

“Supply of new residential projects has been limited in the past few years, with it being less than half of the long-term average,” says Ip. “This is because the government has sold out relatively few sites in previous years. Also, transaction volumes have been low with the government’s restrictive measures in place.”

A much cooler housing market

With the government measures unlikely to change in the near future and no short-term economic stimulus on the cards, Savills expects both mass residential prices to decline by up to 15 per cent over the next 12 months. For example, the townhouse market on Hong Kong Island faces low demand and increasing supply in the short-term, which may see prices drop by 5 per cent to 10 per cent this year, Savills says.

There’s also increasing polarisation in the residential market, given that luxury property buyers are still active amid a slower moving middle market, according to senior manager at Knight Frank, Greater China, Pamela Tsui. She says that home prices in the mass market are expected to see a notable drop this year, which, it seems, will also impact individual investment strategies. 

“We think investors will aim for capital growth rather than rental income, as yields have remained at low levels, between 2 to 3 per cent,” says Tsui.

By Jean-Paul Pelosi