Higher stamp duties, interest rates will not increase ‘distressed’ property asset sales in Hong Kong, analysts say

AA Property is auctioning off 40 distressed asset properties on December 20

PUBLISHED : Monday, 12 December, 2016, 9:07pm
UPDATED : Tuesday, 13 December, 2016, 7:59pm

The number of distressed property assets in Hong Kong will remain low, despite the recent stamp duty hike and likely interest rate rise later this week, analysts say.

Distressed assets – those that owners are forced to sell at lower-than-market prices for reasons such as bankruptcy or debt – are “extremely scarce” in Hong Kong, according to Charles Chan, managing director of valuation and professional services at real estate services provider Savills.

Whenever these assets arise, property speculators or investors are eager to acquire them, he said.

“But we haven’t see any substantial increase in the number of distressed assets for the time being because property owners appear to have strong holding power,” Chan told the Post.

This relatively strong holding power comes thanks in part to the low interest rate environment, according to Vincent Cheung, executive director of Asia valuation and advisory services at Colliers International.

But even if the US Federal Reserve increases interest rates for the second time in a decade at its two-day policy meeting this week, the 25 basis points by which interest rates are expected to rise is “not substantial,” he said.

Although people with existing mortgages may suffer from a rates increase over the next one or two years, it will “not a big problem for the existing order”, Cheung told the Post.

The potential interest rate change comes ahead of AA Property Auctioneers’ next regular sale of 40 distressed assets on December 20, with properties on offer ranging from HK$760,000 to HK$34.8 million.

The figure is well down on the 120 foreclosed properties auctioned off in April, according to managing director of AA Property Tsang Kit-chun.

Tsang said the April number was almost double from the year before and the highest his firm had seen since the 2008 global financial crisis.

But the volumes are tiny compared to 1998 when home prices found a temporary bottom after the Asian financial crisis, and in 2003 during the outbreak of severe acute respiratory syndrome (SARS), he said. SARS generated 6,000 distressed properties available for sale.

He said most distressed assets come are from mainland buyers who have defaulted on luxury homes or offshore loans in Hong Kong, as the renminbi depreciated.

Even though the doubling in stamp duty has reduce transactions and made it more difficult to dispose of assets, it hasn’t, of course, increased ownership costs
Vincent Cheung, executive director of Asia valuation and advisory services, Colliers International.

If the yuan depreciates further, this may “create similar situations,” but the numbers will still be very small in comparison, he said.

Separately, analysts suggest the stamp duty increase of 15 per cent could still result in a rise in defaults.

“Even though the doubling in stamp duty has reduced transactions and made it more difficult to dispose of assets, it hasn’t increased ownership costs,” Cheung said.

The rise will increase the cost of property acquisitions and reduce prices, but won’t have any “particularly averse impact” on the market, according to Chan.

While AA Property recently failed to auction units at a luxury development on 39 Conduit Road in Mid-levels after bids fell short of the reserve price, people remain interested in buying luxury properties, Cheung said.

Bids for the 2,355 square foot luxury units in October were around 20 per cent lower than the HK$134.9 million the buyer paid in June 2014.

Cheung says the failure of the auction was a result of the high asking price, while distressed assets are generally priced much lower than transaction prices.