Monitoring the trends of the Hong Kong property market now, to help their readers make critical predictions for what is to come:

Developers offer 95% mortgage for homebuyers
News
Some local developers are offering first mortgages of up to 95% or launching new flats at attractive prices in an effort to speed up sales at a time of slackening demand. The 95% mortgage for buyers is higher than the 70% limit imposed on banks by the Hong Kong Monetary Authority. At present, most developers provide first mortgages of 80% to 85%. Henderson Land is providing 95% mortgage for buyers of the Wellesley in Mid-levels West, i.e. buyers are required to put down only a 5% initial deposit, or HKD1.2 million, for a home worth HKD24 million. Wheelock Properties has released its Savannah development in Tseung Kwan O at prices starting at HKD3.51 million, the lowest for new flats in the area in three years. (Source: SCMP, 10 May 2016).

Valuation and advisory services view
In May, an estimated total of 2,400 new private residential units from eight development projects in the New Territories and Kowloon should come onto the market. Among those, Wheelock’s Savannah has received an overwhelming market response, being over-subscribed 11x. In view of the increasing supply in the home market, more developers are offering top-up mortgage for the home buyers, the recent top-up home loan offered by the top five developers exceeds HKD20 billion. We anticipate more developers will offer second mortgages for the buyers and this may increase the default risk and number of distressed assets in the market under fierce competition between developers and the third-party financiers in the top-up mortgage market.

Research view
The primary market dominates residential property sales as developers offer greater incentives, thus putting further pressure on secondary market housing. Given that developers’ aggressive lending and downward price trend continues, the phenomenon of homeowners in negative equity is on the rise but not a widespread problem. The current situation is much less serious than in previous housing downturns when borrowing costs and debt levels were high. The latest statistics by the Hong Kong Monetary Authority shows that the number of negative equity cases increased 14x from 95 cases in Q4 2015 to 1,432 in Q1 2016, the highest number since Q4 2011, still far from its peak level of 105,697 cases in 2003.

Bank tips 40% home price dive

News
Deutsche Bank predicts that local home prices will drop 40% in the next three years, with half of that decline taking place this year. At present, the average selling rate of new mass-market flats in the first month is 40%; that for luxury apartments is 19%. During bleak periods in the past two decades, the average selling rate for new mass market flats in the first month stood at between 41% and 67%, and that for new luxury flats between 60% and 74%. This suggests recent home sales performance has been the worst in the past 20 years. Deutsche Bank assumed transactions would have to increase 2.93 times per month so as to digest the amount of new supplies coming in. Prices will have to drop at a faster pace in order to reach sales volume of that level. (Source: The Standard, 10 May 2016)

Research view

Home prices should deflate gradually over the next three years as interest rates gradually normalise and as supply increases to around 23,000 units per annum in the next three to four years. A reversion to the historic mean in Hong Kong's hugely extended price/household income ratio (currently about 19.0 times; the highest level in the world) would imply a decline in prices of perhaps 30% over the next three years or so. This negative scenario cannot yet be ruled out.

Mid-sized Businesses on Revitalized Projects

Agency view (Kowloon office services)
In the past weeks, office search for small-to-mid sized businesses remains stable despite the slowing economy. Cost saving tends to be the primary reason for these business owners when finding a suitable property. Financially speaking, many revitalised offices in decentralised areas provided just that. The over-supplied of revitalised offices, owned by various landlords provide an opportunity window for these business owners when finding suitable spaces. The room of negotiations is increasing for specific buildings that have high vacancy and the trend is likely to be prolonged in the coming quarters. Though the revitalisation application scheme has ended in March this year, there are still 83 applications that are being processed. Of this total, more than half of the buildings are located in Kowloon East, and more specifically in Kwun Tong. Application for revitalisation to office spaces is the most popular in the category.

Research view
Kowloon East remains an attractive location for occupiers to expand in Hong Kong, with the location accounting for the lion’s share of new supply in the city and providing lower cost options than on Hong Kong Island.

Two office transactions recorded in the week of May 9

Agency view (Capital markets and investment services)

We have seen two transactions over HKD100 million confirmed in the week of May 9-13. The majority portion of Capri Building at 130 Austin Road in Tsim Sha Tsui has been sold for HKD118 million. This represents an unit rate of circa HKD6,600 per sq ft, a passing yield of 3.35% on 88% occupancy. Separately, Success Universe Group Limited has acquired unit 1003-04A, Tower 1, in Admiralty Centre for HKD159 million (HKD17,800 per sq ft) from Yuanta Securities.

Research view
Office sales remain focused on smaller ticket transactions amid limited availability of whole block developments for sale. This has encouraged large investment funds to shift their focus to strata-title office properties and we believe the aforementioned trend will continue.

More gloom in tourism industry

News
Wharf reported retail sales at Harbour City and Times Square dropped 19% and 20% respectively in Q1 2016 from a year earlier. The Hong Kong and Shanghai Hotels, operator of the Peninsula Hotel chain, reported the revenue per available room in Hong Kong decreased 7% year-on-year in Q1 2016 to HKD3,568. The average room rate for The Peninsula Hong Kong slipped 2% YOY to HKD5,017, while occupancy rate declined 4 percentage points to 71%. Chow Tai Fook Jewellery Group Ltd.’s full-year profit that ended March 31 decreased 40% to 50% compared to the previous year, the company said. (Source: The Standard, 12 May 2016; Bloomberg, 12 May 2016)

Research view
Hong Kong’s retail sector is in a difficult patch amid the continuing drop in tourist arrivals, down 10.9% YoY in Q1 2016, in which those from the mainland saw a steeper deterioration of 15.1% YoY. Retail sales will continue to fall by another 6-7% this year according to Hong Kong Retail Management association estimates. This followed a 3.7% decline in 2015. Despite a difficult climate, the spending power of the rising middle class remains in place and shoppers are more likely to be interested in affordable luxury rather than ultra-luxury brands. Consumer necessity is the sector that will continue to have strength. Colliers Research sees significant appetite for owners of retail properties to diversify, for example by exploring new retail concepts and seeking to attract a broader mix of retail tenants including more food and beverages outlets, affordable luxury fashion brands and lifestyle stores.