High price to pay for a life of luxury
The luxury homes market continues to sizzle, with developers and buyers showing faith in the growth prospects for new properties.
Among the new luxury projects to have gone on sale in the past few months are: The Hermitage in West Kowloon, Larvotto in Ap Lei Chau, Meridian Hill in Kowloon Tong and Broadwood Twelve in Happy Valley. Buyers, especially those from the mainland, eagerly snapped up the luxury homes despite government policies aimed at curbing property speculation.
Property consultants remain optimistic about the luxury market and expect prices and rents to rise further, given a shortage of luxury supply and strong demand from buyers and tenants.
Simon Lo Wing-fai, director of research and advisory at Colliers International, says the supply of luxury homes will continue to be limited.
'In traditional luxury locations, the future supply of luxury residential units will remain scarce,' he says. 'According to our research, the average completion rate in the three traditional luxury locations - The Peak, Island South and Mid-Levels - will be 194 units per annum, 65 per cent below the long-term average of 562 units per annum.'
Two of the bigger-sized luxury residential projects in traditional luxury districts on Hong Kong Island, scheduled for completion in the coming year, include a redevelopment by Swire Properties at 53 Stubbs Road and the Seymour project by Wing Tai Asia at 9 Seymour Road in Mid-Levels.
The Swire Properties project will be the first residential development in Asia undertaken by the award-winning architect Frank Gehry. It will provide 12 super-luxury homes of 6,000 sqft each, overlooking Victoria Harbour. Wing Tai's Seymour development will offer 82 large-sized apartments of four-bedroom and five-bedroom layouts.
Upcoming projects on The Peak include Manhattan Group's detached house development at 54 Mount Kellett Road and Sun Hung Kai Properties' (SHKP) 12-house development at 12 Mount Kellett Road. On Island South, SHKP is developing 31 houses at 9 Shouson Hill Road. Another two new developments are Fook Yik Estate's project at 79 Deep Water Bay Road and Alba Securities and Investment's project at 43 Island Road.
According to the Rating and Valuation Department, the existing stock of units measuring in excess of 1,000 sqft, each under categories D and E, accounts for only 7.5 per cent of the total private residential stock.
Stella Abraham, associate director of the residential division at CB Richard Ellis, says: 'We don't think new supply of luxury residential properties can meet demand. The Rating and Valuation Department expects 1,430 and 1,640 units under categories D and E to come on stream in 2010 and 2011, respectively, but these just represent about 2 per cent of the existing stock per year.'
Abraham says fierce competition at government land auctions for residential sites in traditional luxury districts indicates the relative scarcity of land for luxury residential development.
Xavier Wong, director and head of research for Greater China at Knight Frank, says the supply of large residential units in Hong Kong will continue to be limited.
'Although the government has been increasing the supply of luxury residential sites in recent months, these sites will take at least two to three years to be translated into completed residential units,' he says.
With a rising number of multinational corporations shifting operations to Hong Kong, Wong says there is increasing leasing demand from expatriates for luxury homes. Given the emerging trend of cash-rich mainlanders, who restructure their asset portfolios to include Hong Kong properties, they have become an increasingly important source of buying demand for Hong Kong's luxury homes, he says.
'Luxury buying and leasing demand will remain strong in the coming 12 and 18 months, with the local economic recovery taking hold, the mainland economy remaining robust and interest rates staying low,' Wong says. 'High-end home prices are expected to rise by 15 to 18 per cent in 2010, with a further 10 to 12 per cent growth in 2011. We believe the market growth can last at least until 2012.'
In Hong Kong, there is a good mix of tenants in the luxury residential market. According to Lo, about 75 per cent of tenants for luxury homes in Hong Kong come from banking and finance, with the rest from business services, technology, legal practice, consulates and insurance sectors.
Lo says mainlanders account for 40 per cent of luxury home buyers based on the latest market activity, while upgraders, expatriates, industrialists and investors each took 15 per cent. Abraham says most buyers and investors in traditional luxury residential properties are local high-net-worth individuals, but there is an increasing presence of mainland investors, especially for new residential apartments along railway lines.
She estimates that mainland money accounts for at least 30 per cent of buyers of these new luxury apartments. According to CB Richard Ellis' latest research, luxury prices and rents have increased by 16 per cent and 12 per cent, respectively, in the first three quarters of this year. The consultant expects prices to rise by 18 to 20 per cent and rents by 16 per cent for the whole year.
Lo predicts that luxury home prices will grow by a further 10 per cent in the next 12 months, with strong cross-border buying interest and a low-interest rate environment. He believes luxury rents will increase by 15 per cent during the period due to limited supply, strong leasing demand and growing inflationary pressure.