The announcement of a further round of cooling measures by the government last Friday was not entirely unexpected - at least in regard to the residential market, as sources had warned about a developing property bubble while showing willingness to act to curb market excesses.
However, including commercial property is a departure from previous policy which focused entirely on the residential sector.
Ironically, the moves to cool commercial demand are in part a result of previous government measures which shifted demand from residential to commercial property.
In a report following measures in October last year, CBRE highlighted that "while the aim of the latest measures is to curb speculative activity in the residential market, some investors may now turn their attention to commercial property. As such, we expect to see a rise in investor demand for strata-titled offices and industrial units given their relatively digestible lot sizes for private investors and ease of management".
This undoubtedly came to pass.
The report also noted that "the consequences and outcomes of policy initiatives are not always predictable and can often bring about some unintended side-effects. We may see the introduction of further measures going forward and the market should therefore prepare for further uncertainty."
A doubling of stamp duty and the payment of this tax on sale agreement (rather than completion), together with the announcement by the Hong Kong Monetary Authority (HKMA) of reduced maximum LTV [loan to valuation] ratios for mortgages, will hit hardest on strata title and speculative investments.
Short-term policy is clearly focused on capping demand while the longer term objective of increasing the supply of land for residential use is achieved. While the merits of increased residential land supply may be debated, at least the policy is clear. Unfortunately there is no such plan for commercial real estate.
Hong Kong has an acute lack of commercial space, be it for offices, retail or industrial use. The overall vacancy rate for the office market is less than 3 per cent, despite demand running at half its long-term average.
When economic activity picks up, demand for office space will follow, and the shortage will intensify. Long-term urban regeneration plans may be laudable but a lack of clarity and urgency is a major concern.
The lack of office space logically feeds through to a lack of available investment-grade product on the investment market. It also increases demand for investment product as occupiers unable to find leases, buy their own.
Government policy of increasing the supply of residential sites through the revitalisation of industrial space is also squeezing occupiers. This is in a sector which has a vacancy rate of just 1 per cent for warehouse space and where a 2.4 million sqft logistics development (Interlink) was 99 per cent pre-let. Moreover, space vacated by occupiers moving to Interlink was quickly back-filled due to the strength of demand and lack of alternatives.
Of immediate concern to occupiers is security of tenure and this is motivation behind some investment deals for own-use purposes.
We do not expect these policy measures to have lasting effect beyond cutting short-term speculative activity. However, the fact that government is prepared to intervene in the commercial market warrants attention. Of more immediate concern though is the lack of a plan to tackle the shortage of commercial space.
If the government wants to curb property prices in sectors outside of residential it needs to address the inaction around supply and to give clear direction on what supply will be delivered and when, similar to what has been done in the housing sector.
Without this, the government's draconian tax measures will have little effect on solving the underlying supply and demand problem that exists.
What is the plan for office supply? What is the plan for retail supply? What is the plan for industrial supply? And while we are at it, what is the plan for additional international school places, hotel rooms, columbarium places, hospital beds etc?
All serious questions that need addressing and addressing fast. Increasing property taxes is not the solution, master planning and the governments will to expedite rezoning, change of use, plot ratios etc, is.
This rebalancing of supply and demand has commenced in the residential sector and now needs to be urgently addressed across all property sectors. It is now time for a bold government to step in and take action in the short, medium and long term so that Hong Kong not only avoids any property bubble but also prospers from the unique position it finds itself in, in the new world economic environment whereby the West is increasingly looking East for growth prospects.
At the moment there is a danger that the government through lack of proactive master planning and sudden taxation is sending the message that this World City, the one we all love, is shut, or at least wants to be shut for business.
Craig Shute is CBRE's senior managing director, Hong Kong, Macau & Taiwan