New supply is casting a pall over Hong Kong's property market, after news that land sufficient for 13,600 flats may go out to tender from Kowloon-Canton Railway Corp. The concern is that these apartments - to be built on top of KCRC stations along the West Rail and the Ma On Shan Link - could derail Hong Kong's property revival. Speculating on supply four years down the track can seem pointless in a market where single buildings routinely face weekly price adjustments by developers. But it is the potential sea change in policy that has added significance. Official support for property prices might be giving way to other priorities, such as the government's own fiscal imperatives. Explanations expounded for Hong Kong's property rebound have included low interest rates, pent-up demand, speculative capital inflows and a recovering economy - but it is the government's restriction of land supply that built the footings for the revival. A carefully orchestrated two-year hiatus on new land sales, including a moratorium on rail-linked development, had the new supply of flats shrinking to a trickle by 2007. An unwritten government policy to shore up the property market added to conviction that prices would rise. There have been few dissenting voices as prices soared by 40 per cent or more, developers cleared backlogged projects, negative equity declined and the resumption of land sales boosted government coffers by more than $3 billion. It was as if Hong Kong had returned to that virtuous property cycle not seen since pre-handover days. Yet with transactions stalling recently and China unleashing measures to cool its economy, the property market has been facing a renewed test of confidence. Hence the timing of KCRC's announcement appears unhelpful. So much so that the government chimed in with a statement yesterday that the 'KCRC tendering plan is only a proposal'. The return of rail-linked development brings more regulatory uncertainty into the property market. Rather than having new supply triggered by the direct bidding by developers through the land auction application list, rail-linked development generates supply by administrative means rather than market demand. But as the swollen budget deficit demands attention, the government is under pressure to reorder priorities. The government like any monopolist - it is the only provider of land - has a choice between high price and higher revenue by selling greater quantities at a lower price. Increasingly it looks to be choosing the latter policy, which means a tougher time lies ahead for mass residential property prices. The sale of the KCRC, via a merger with listed MTR Corp, is a major part of the government's asset privatisation programme. But the ban on property sales had undermined KCRC's business model. As it stands, the company can promise only a gloomy future of falling profits and potential losses, confirmed yesterday by rating agency Fitch, which downgraded its outlook on the rail operator's debt from stable to negative. The prospects of a successful merger may be remote unless the KCRC package is wrapped with property development rights. Given KCRC's book value of $60.2 billion, this is a deal too big to be derailed by vested property interests.
