Weekend Property

It’s ‘not a huge correction’ but luxury residential rents in Hong Kong experience further decline

A combination of global uncertainties and lower corporate housing allowances has left the prime rentals market feeling the pinch, and some experts are predicting a further drop over the course of this year

PUBLISHED : Friday, 05 August, 2016, 11:09am
UPDATED : Friday, 05 August, 2016, 2:20pm

Living the high life in Hong Kong does not appear to be a priority these days, as top executives are feeling the pinch of global economic uncertainties, while companies are cutting back on housing allowances.

Luxury residential rents in Hong Kong have dropped for three consecutive quarters, with the sector experiencing one of the biggest declines among the 17 markets studied by Knight Frank.

In the first quarter of this year, prime residential rents in Hong Kong fell by 5.2 per cent, according to the Knight Frank Prime Global Rental Index. Although preliminary data for the second quarter suggests some clawing back by June (down 4.9 per cent), as the year pans out, the real estate services firm predicts more pain – or gain – for the sector, depending on one’s perspective. David Ji, Knight Frank’s director and head of research and consultancy, Greater China, forecasts an annual decline of 8 per cent will be recorded for luxury residential rentals.

Despite Hong Kong slipping to second-last place on the index – ahead only of the quarter’s biggest loser, Nairobi, Africa, down 7.9 per cent – Ji doesn’t see this as a worrying sign.

“Five per cent is normal, not a huge correction,” he says. It was to be expected, given the corresponding drop in sales prices for high-end properties.

Softening expatriate demand is hitting the rental market, Ji explains. Amid a climate of growing global economic uncertainty, many corporates are cutting their budgets for executive accommodation. To make their housing allowance go further, some staff are moving out of the core Central districts and going “further down the train line”, he says.

Yet, on the global scale, Hong Kong looks comparatively healthy, Ji points out. “We have virtually full employment, and there is no surplus of luxury housing. Demand for rental accommodation is still there,” he says.

Besides, Ji adds that it’s still far cheaper to rent, rather than buy prime property in Hong Kong, and many executives will always prefer to live close to their workplace.

Drilling down to specific locations, research conducted by Savills shows that luxury apartment rents fell across all districts except south side in the first quarter, in the wake of reduced housing demand from financial services tenants.

Rents in Happy Valley and Jardine’s Lookout fell by 2 per cent over the quarter, followed by Mid-Levels (down 1.3 per cent) and Pok Fu Lam (down 0.3 per cent).

We expect landlords to lower their asking rents further in light of soft demand and an increase in competition from the new projects
Simon Smith, senior director, Asia-Pacific, Savills

Hardest hit were luxury rents in Kowloon and the New Territories, which fell by 5.8 per cent and 3.3 per cent, respectively, mainly due to the increase in available units completed in Sha Tin, Yuen Long and Ho Man Tin.

The launches of new developments also drew some occupants away from the leasing market, choosing to purchase instead. This was especially evident in Ho Man Tin, where a strong pipeline of launches includes Mantin Heights by Kerry Properties (1,429 units), One Homantin by Wheelock Properties (561 units), and Ultima Phase 1 by Sun Hung Kai Properties (256 units), as well as Sai Kung.

According to Simon Smith, Savills’ senior director, Asia-Pacific, this new supply is likely to put more pressure on luxury rents this year.

“We expect landlords to lower their asking rents further in light of soft demand and an increase in competition from the new projects,” he says. And already, Smith sees evidence of landlords being “generally willing to go the extra mile to retain tenants in the absence of any major new industry demand drivers, dampening market activity levels further”.

Meanwhile, Colliers International’s latest research shows that the higher the rental, the less likely the take-up. Flats with monthly rents between HK$40,000 and HK$80,000 remained the most active in the first half of this year, but there are fewer tenants seeking flats with monthly rents between HK$80,000 and HK$100,000.

“Leasing activity in the top-end segment continues to suffer from a limited pool of high-budget tenants (with monthly income of HK$150,000 and above),” Nigel Smith, managing director of Colliers Hong Kong, wrote in the report.

“Multinational companies remained tight on housing allowance budgets, while some had been considering reducing housing allowances in the wake of the increasing global economic risks and uninspiring business conditions.”

Smith forecasts that rents will continue to face downward pressure. “Global banks and investment banks are a key source of high paying residential tenants,” he says.

“However, the financial sector is now under significant pressure to reduce costs and headcounts, and expatriate arrivals working for non-financial companies will remain the key contributors to the luxury leasing market.”

Colliers predicts luxury rents will slide 5 per cent this year, after going up 9.8 per cent in 2015.