Landlords brace for Hong Kong’s rent to decline as history shows leases tracking home sales

Memo to Hong Kong renters: You might want to wait a bit before signing that new lease.

Rents, while at an all-time high right now, may be getting ready to fall.

In the past three housing downturns, rents and home prices fell – substantially – in tandem.

And data show that home prices have already started to slip, prompting some property watchers to think that a dramatic shift may be getting underway in the world’s least affordable housing market.

“Whenever home prices drop, rents will drop. There is never an exception,” said Nicole Wong, the regional head of property research at CLSA. “As the sentiment further dips, we will see more individual landlords who hold bearish outlooks on the property market soon lowering down their rents to get property leased as soon as possible.”

Already, bargain hunters can find cheaper rents in some areas, like in Tuen Mun in the New Territories.

Even rich renters are getting deals – one luxury flat on The Peak rented at 16 per cent less than its asking price.

One of the major drivers behind the change in sentiment is the vacancy tax steaming toward approval, which would hit property developers who hoard flats with painful penalties. Instead, they are offering deals to sell flats quickly and choosing to rent others. That is increasing housing supply, weighing down sale prices and rents.

The cycle has been seen in the city three times over the last two decades.

In October of 1997, amid the Asian financial crisis, Hong Kong home prices began cratering, plunging a jaw-dropping 52.4 per cent in 12 months, according to CLSA data. Rents started sliding as well, falling by 33.9 per cent from September of 1997 through October 1998.

Ten years later, the city’s housing felt the lashing of the global financial crisis. Home prices plunged 24 per cent between March of 2008 and December of 2008. Rents fell even more – by 26 per cent – between June 2008 and January 2009.

And just three years ago, the city suffered another housing sting – albeit a less painful one than the earlier two.

The US Federal Reserve had raised its benchmark interest rate for the first time in nearly a decade. Hong Kong’s stock market crashed that year, 2015, recording a 34 per cent decline between April 2015 and February 2016 in the shadow of a market meltdown in mainland China.

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In the turmoil, the city’s housing prices dropped 12.6 per cent from August 2015 to March 2016. Rents declined 13.6 per cent from July 2015 to the following February.

Right now, many property analysts believe the city is at the cusp of a similar downward cycle, although they differ on how serious and long the downturn might be.

What’s catching their attention are such things as prices of used homes ending a 28-month rally in August, with the government reporting a drop of 0.076 per cent. Also, developers have felt they have needed to slash prices of new flats coming onto the market to try to move them quickly as buyers have become more wary.

Meanwhile, Citibank, UBS, CLSA and Nomura have issued red flags, predicting drops of as much as 15 per cent in home prices in the coming 12 months.

On the other hand, rents, however, are at all-time high per square foot, according to data from the government’s Rating and Valuation Department. It’s only on the ground, where property agents are seeing rent deals favourable to renters, that signs are appearing that rents may be falling as well as home prices.

“It is certain that in a protracted downturn, [rents] will go down in tandem with housing prices,” said Denis Ma, head of research at JLL. He says he believes rents are under pressure.

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Celia Chiu, a 28-year-old professional, may be one of the early beneficiaries of a cycle change.

She got a new job on Hong Kong Island and wanted to live there as well. Her budget was no more than HK$10,000 (US$1,275) a month for a flat. But she could only find pricier flats.

Then, recently, she landed a nice 200-square-foot flat near the Quarry Bay MTR station for HK$9,800 – right in her desired rent sweet spot.

“I guess I am just lucky,” she said. “I had almost given up. All of a sudden, agents were showing me more flats that fit my needs and budget. I nailed down this one like I was a lucky lottery winner.”

Letizia Garcia Casalino, head of residential services at Colliers, said they expect rent reductions of 3 per cent to 5 per cent in the coming 12 months, though some districts might see declines of up to 8 per cent.

But some agents are reporting even bigger drops than that right now.

Michelle Lung, who has been working for Many Wells Property in Tuen Mun for 14 years, said she has seen rents drop there by up to 15 per cent since September.

“The rent of two-bedroom apartments at Parkland Villas near Lingnan University could fetch HK$13,500 in August, but now HK$11,500 is not a bad deal,” Lung said, explaining the perspective of landlords with weaker hands.

Meanwhile, under the threat of the vacancy tax aimed at discouraging hoarding, developers are releasing more housing into the market.

Looming big vacancy tax is prodding city’s developers to sell empty flats

Sun Hung Kai Properties, which holds the largest stock of unsold flats, is setting aside 140 units at Tower 6 of its luxury Victoria Harbour project in North Point for leasing, said deputy managing director Victor Lui Ting.

Meanwhile, the developer has put up for rent 128 apartments of The Kennedy on Belcher’s in Kennedy Town of between 345 square feet to 834 square feet.

Two batches of 70 units have almost all been rented while another 58 units will be put onto the market in mid-November.

Developers had been squirrelling away choice flats as home prices soared. Some flats have been held 10 years, without ever having been lived in. The announced vacancy tax is credited with prying such properties loose from developers.

And more new projects are coming onto the market.

“We see more new upper market projects are going to be delivered soon, such as in areas near Kowloon Station and in the New Territories. That will put pressure on the rent of existing luxury apartments,” said Elton Leung at Ricacorp Properties.

Leung recently brokered the lease of a 2,865 square foot flat at La Hacienda in the exclusive Peak district, which rented for HK$119,000 after price reductions totalling HK$19,000, or nearly 16 per cent of the asking price.

Some landlords are taking drastic steps to get their properties leased, with some dropping rents by 27 per cent.

One 1,039 square foot flat at The Pavilia Bay in Tsuen Wan was leased for HK$38,000 on October 17, down 27 per cent from the asking price of HK$52,000.

A four-bedroom flat at The Cullinan atop of Kowloon Station rented for HK$67,000 after price reductions totalling HK$13,000, or more than 16 per cent of the asking price. It is also HK$1,000 lower than the rent paid by the previous tenant who moved in two years ago.

“Supplies of available flats for rent will increase when some property owners holding onto selling switch to leasing. Thus, we will see rents drop in general,” said professor Eddie Hui Chi-man of Polytechnic University's department of building and real estate. He expects rents to fall through at least the middle of next year.

Jessica Chow, an agent at Century 21 monitoring the Sha Tin district, told the Post that about 10 per cent of her clients who had originally wanted to sell their properties decided to lease instead in the past two weeks.

“A homeowner at City One Sha Tin wanted to sell his two-bedroom apartment for HK$6.1 million in July. But the price dropped to about HK$5.3 million this month. So the owner decided to lease it for a monthly rental of HK$12,000,” Chow said.

Property owners haven’t been helped by the local stock market, which is down more than 17 per cent for the year.

“Some homeowners who have lost big bucks in the stock market need cash to put into their pockets as soon as possible and thus will be more willing to offer their flats at discounted rent,” said Derek Chan, head of research at Ricacorp Properties.

Additional reporting by Jane Zhang