Gloom sidelines investors
The uncertainty over the financial crisis and the looming threat of a global recession are keeping property buyers on the sidelines, with many adopting a wait-and-see approach before making a decision on the city's real estate market.
The Land Registry reported just 6,075 transactions of primary and secondary residential units in September compared with last year's monthly average transaction figure of 10,298.
The lower volume can be attributed to fewer new property launches in the primary market and the standoff between buyers and sellers in the secondary market.
'Buyers are unwilling to bid up and sellers are reluctant to sell in the secondary market. Hong Kong households' balance sheets are actually strong now, much better than in 1997, so sellers will not sell unless they are in financial distress,' said Irene Chow, senior vice-president and Greater China equity strategist at Credit Suisse Private Banking division.
Though market fundamentals look strong, underpinned chiefly by a low interest rate environment and limited housing supply, it is the loss of confidence in the financial markets that has made people increasingly jittery.
At the top of everyone's agenda is job security, with the apprehension about the future exacerbated in recent months by news of layoffs in the financial sector, corporate bankruptcies and slower consumer spending.
Colliers International executive director for residential sales Ricky Poon said: 'The market environment is even tougher than [during the Sars outbreak] in 2003. Prices were low then but people were at least buying. With this global financial crisis, however, people are just not willing to buy now because prices have gone up so much and they are worried about what might happen to their jobs.'
Leasing demand for residential units is expected to soften as companies across the board are reining in expansion plans and slashing or freezing headcount.
Marcos Chan, Jones Lang LaSalle head of research for Hong Kong and Macau, said: 'The fourth quarter is traditionally a more active quarter for leasing deals because expatriates like to finalise their rental agreements before they go home for Christmas.
'But, with companies taking a more cautious approach, we expect to see slowing leasing demand in the last quarter,' he said.
Capital values are expected to further plummet so brokers are advising investors to hold off on buying for the time being.
Colliers International is projecting capital values to fall by 15 to 20 per cent over the next 12 months.
Mr Poon said: 'We believe the market will still fall, so investors should wait at least until after the first quarter of 2009 to buy because we expect prices to be lower then.'
Rental market yields were at 3.6 to 4 per cent, Mr Poon said, noting yields next year were expected to be at 3.4 to 3.6 per cent.
Brokers said properties on Hong Kong Island offered the highest rental yield due to the high demand, proximity to the Central business district and good network of schools.
Residential units in the secondary market can also offer slightly better rental returns compared with new developments.
Mr Chan said: 'Developers typically sell new developments at a higher premium so yields are less attractive than the secondary market.'
Mass residential properties with club, pool or gym facilities and old walk-ups have the highest rental yields. Those with facilities because of greater demand while the latter offer more room for the landlord to add value through interior decoration.
Luxury properties such as houses on The Peak have posted the lowest rental yields in the past few years, at just 2.5 to 3 per cent, because of their massive capital value appreciation.
Mr Poon said: 'Entry prices for a house on The Peak are HK$100 million to HK$300 million but rental is typically only about HK$200,000 to HK$400,000 per month. This is why people typically buy luxury houses on The Peak for their own use only and are focused just on the capital gains because the rental yield is lower.'
A downward market can make property investors typically focused on short-term capital gains rethink their investment strategy.
Xavier Wong, director and head of research at Knight Frank, said: 'In a market downturn the prospect of capital appreciation is less certain and the yield is given a greater weight.'
Mr Wong said investors should take into account the location of the property and the security of rental income when scouting for units to invest in.
'Quality tenants will continue to abide by the terms of the contract while the less secured tenants may elect to re-negotiate the rental or even surrender the tenancy, resulting in a loss of rental income for the landlord,' Mr Wong said.