Property prices to take credit crunch blow, warns CLSA

PUBLISHED : Wednesday, 24 September, 2008, 12:00am
UPDATED : Wednesday, 24 September, 2008, 12:00am

Hong Kong commercial and residential property prices will tumble up to 30 per cent by the end of next year as the global credit crunch filters through the markets, according to brokerage firm CLSA.

The brokerage said mass residential prices would decline 20 per cent, while the luxury sector would drop 30 per cent.

Office rental prices in Central would drop 30 per cent over the next 15 months as demand weakened due to the financial crisis in the United States, CLSA forecast.

Nicole Wong, the head of Hong Kong and China property research at CLSA, said prices were down 6.8 per cent from their peak in March and that volume had dried up in the past three months.

Registered property transactions last month fell to 6,402, the lowest since January 2006, according to the Land Registry.

'I had calls from family friends who were worried and wanted to sell their flats after the Lehman episode,' Ms Wong said.

Short-term supply will increase as speculators dump units on to the market bought just last year, she said.

The sharp rally in prices in the fourth quarter of last year attracted speculators who would dump at the first sign of price weakness, Ms Wong said.

Assuming that 50 per cent of primary unit buyers and 30 per cent of secondary unit buyers in the fourth quarter were speculators, she estimated this could create pent-up supply of 14,346 units.

Demand is set to contract violently, she predicted, because Hong Kong is a 'city of paranoids' who have learned that wealth locked up in property can be wiped out during a financial crisis and would react quickly this time.

However, Ms Wong said she thought it unlikely that many buyers would cut their losses by cancelling purchases of new flats.

Developers are getting smarter and not accepting buyers who use shell companies, a common practice for short-term speculators, she said.

Angela Lee, a partner at Baker & McKenzie, said developers reserve the right to sue defaulters to recover the difference between the original purchase price and the price achieved in a resale later.

'Once a buyer signs the sale and purchase agreement with a developer, both sides have to honour the contracts,' she said.

Ms Wong said she thought the bankruptcy of one large investment bank was just the beginning of a sharp demand contraction period for the office sector.

'The last time office demand contracted after the dotcom bubble burst, Central office rents dropped 21 per cent in 2001,' she said.

'The situation is very shaky, with current spot rent 153 per cent above the HK$74 level when the last correction cycle started.'

Grade A office rents surged to a new high in August when a company signed a lease to pay HK$200 per square foot at AIG Tower.

With fresh supply not due until 2011, the sector's vacancy rate fell to a low of 0.86 per cent in March before rising to 1.3 per cent in June.