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Harder for HK developers to replenish land bank with the influx of PRC counterparts
HONG KONG, 29 November 2016 - Notwithstanding the latest stamp duty measure, residential prices are expected to rise up to 5% next year, according to JLL’s Year-end Residential and Land Market Review 2016 published today. The competitive in land market will continue next year due to the influx of mainland developers and new local players. It has become harder for Hong Kong heavyweight developers to win development sites.
Land prices rebounded in the second half of 2016 as more prime sites were made available for sale amid active participation from PRC and local developers. About 62% of the residential sites made available for sale via government tender this year drew PRC developers, an uplift from the 53% recorded in 2015. PRC developers were on the winning end of 24% of all residential sites sold this year, on par with that a year ago. Their increased participation in the local public land sales market has been driven by a combination of yuan devaluation, a desire to diversify away from mainland cities and supply constraints of the local market over the longer-term.
Increased competition in the public land sales market saw 10 out of 13 residential sites sold at prices above market expectations in the second half of the year, in contrast to the first half of the year when no sites were sold above the higher end of market estimates. Also, there has been an increase in the average waiting time between winning bids by developer from 12.6 months in 2015 to 27.6 months in 2016 (year-to-date). Looking ahead, we may see more developers entering into joint ventures to increase their chances of winning in government tenders.
Dorothy Chow, Regional Director of Valuation Advisory Services at JLL in Hong Kong, said: “In 2016, Hong Kong’s heavyweight developers faced increased competition from both mainland developers and new local players. It has become harder for them to win land sites and we believe the situation will continue into 2017. Mainland developers will remain active in government land sales to expand their business in Hong Kong whilst local developers will likely focus more on opportunities in the New Territories and MTR projects.
However, the public land sales market does face some uncertainties, including:
Chow expects land prices to remain largely stable against these uncertainties in 2017.
Average monthly residential sales rebounded 55% y-o-y to 6,123 in the second half of 2016. A buoyant stock market, post-Brexit capital inflows seeking safe-haven investments and strong pricing the public land sales market all contributed to the uplift. Capital values of mass residential properties rebounded by 9.5% (as of October) from their in-year lows (last trough in May 2016), reversing much of decline recorded earlier in the year to post full-year growth of 1.6%. Capital values in the luxury segment of the market stayed largely flat in 2016, reflecting the greater resilience of that market; especially in the very top-end of the market where capital values have remained solid throughout the year.
Notwithstanding, overall sales volumes in 2016 should remain below 2015 levels (55,982 transactions), as sales activity is expected to soften following the government’s decision to raise stamp duties across the board to 15% on 4 November. Whilst volumes are likely to take a hit over the near-term, we expect prices to remain broadly stable for a number of reasons:
The secondary market accounted for only 68% of all residential transactions this year, compared with 90% in 2010.
The drop off in demand comes at a time when more supply is set to be launched onto the market, albeit through an increase in the number of small units. 29% of all new private housing supply is expected to be Class A units (saleable area less than 429 sq ft) between 2017 and 2019; equivalent to about 6,300 units a year, which is substantially higher than the annual average level of 700 units produced between 2007 and 2011 (before the government introduced the Buyer’s Stamp Duty and Double Stamp duty). The increase in the supply of small units is a product of the government’s market cooling measures, which has effectively steered developers to build smaller-sized flats given the more affordable lump sum payments involved.
Joseph Tsang, Managing Director and Head of Capital Markets at JLL, said: “Under the latest cooling measure, residential sales volumes will shrink over the short-term as buyers adopt a wait-and-see attitude. Developers will need to reassess their sales strategies. But this measure is unlikely to have a huge impact on capital values, given strong pent-up demand, large number of cash-rich buyers in the market (including mainland Chinese buyers), and still low mortgage rates. Hence, while volumes are likely to soften, we expect capital values of mass and luxury residential to remain broadly stable and rise by up to 5% in 2017. The rental market for luxury properties, on the other hand, is forecasted to fall by up to 5% given the ongoing tenant downgrading trends that have characterised the market for the past 12-months.”
Hong Kong Prime Residential Indicator - % Change
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JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 70,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. As of September 30, 2016, its investment management business, LaSalle Investment Management, has $59.7 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, www.jll.com.
JLL has over 50 years of experience in Asia Pacific, with 36,000 employees operating in 94 offices in 16 countries across the region. The firm won 15 awards at the International Property Awards Asia Pacific in 2016 and was named number one real estate investment advisory firm in Asia Pacific for the fifth consecutive year by Real Capital Analytics. www.jll.com/asiapacific
In Greater China, the firm was named ‘Best Property Consultancy in China’ at the International Property Awards Asia Pacific 2016, and has more than 2,200 professionals and 14,000 on-site staff providing quality real estate advice and services in over 80 cities across the country. www.joneslanglasalle.com.cn
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