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The Property Market - a Silver Lining?

January 99

      
A sense of greater optimism has crept into the property market, following the recent downward adjustment in nominal interest rates, but there are questions over whether the optimism is justifiable and sustainable.

The residential sector is regarded as the barometer of the property market, and has significant influence on the economy.

According to Mr Nicholas Brooke, Chairman, Brooke International, the increase in the number of recorded agreements for Sale and Purchase in November and December is encouraging, representing an increase in transactional activity, but the reality is that little has changed as far as fundamentals are concerned.

"A great deal in Hong Kong is linked to sentiment and whilst I sense that developers, buyers and lenders would like to think that the worst is over, I believe that the market will be looking for a combination of indicators and announcements, before it is convinced we have reached the bottom," he said.

Mr Brooke said that there is still too much uncertainty in the area of land sales, loan programmes and the division of responsibility for housing production between the private and public sector for Hong Kong to see clearly the likely long-term future direction of the market.

"Firstly we will need to see a continuation in the volume of sales from the December 14,920 level to the same level in January. I hope this trend continues in 1999 with a monthly average of 11,000. These are realistic targets, which Hong Kong has achieved in the past when the property market has undergone some correction," he said.

The challenge, however, is more complex. In conjunction with an increase in sales activity the market will be looking to the Administration for leadership on a number of issues.

"There is an urgent need for the Government to issue a clear message on land sales. In my view we should and try and resume 'business as usual' as both developers and prospective home owners need the assurance of a steady land supply," he said.

Mr Brooke warned that any resumption of sales would have to be carefully structured to reflect location and affordability. He added that there will be a shortage of liquidity so banks will be unlikely to fund sizable land acquisitions by developers until they are convinced that the market is on the road to recovery.

In the private sector, based on projects under construction or committed to proceed, 1999 will probably see the completion of 34,000 units.

"Given the previous historic levels of production, averaging 30,000 units per annum, this is well within absorption levels, particularly given the new levels of affordability, following a 50 per cent fall in capital values," he said.

However there is an inventory of some 12,000 units overhanging the market, which will need to be absorbed.

"Prospective purchasers are sitting on the fence until they can see some firm indication that values have bottomed," he said.

Potentially, the market could drift down by a further 5-10 per cent, but if the prospect of further reduction in nominal and real interest rates was to turn into reality, values could consolidate at present levels.

"The Administration also needs to produce specific proposals on restructuring and streamlining of the housing ladder and clarify the roles of the principal parties involved in housing production," he said.

The Chief Executive, Mr Tung Chee Hwa, in his Policy Address, indicated a likely shift of direction with less emphasis on the provision of housing units by the public sector and more use of financial assistance to encourage and expand home ownership in Hong Kong.

"This needs to be converted into concrete proposals with initial attention being focused on rationalising and explaining loan schemes currently being promoted to encourage home ownership - as some confusion exists," he said.

Mr Brooke recommended there should be a clear indication from the Housing Authority as to any proposed switches between public rental and home ownership provision over the next five years, and what scope, if any, there is for replacing physical provision with financial assistance.

"Clearly there is a continuing need for some element of Home Ownership Scheme (HOS) but there is an argument for part of the monies that might be invested in HOS to be utilised to assist potential purchases to acquire either the Housing Authority or private sector units. It is generally accepted that the provision of Sandwich Class Housing has been overtaken by events and is no longer appropriate to the situation," he said.

In contrast to the modest contributions of the private sector the Housing Authority will be embarking on a major construction programme that will increase total supply in 1999 to 87,000 with 110,000 in 2002.

"The later stages of the programme could be affected by the proposals outlined in the Chief Executive's Policy Address to review the role of public sector as a provider of housing and the possible switch of part of the at production to the private sector.

"But, to switch to private sector production will involve a considerable act of faith on the part of the Administration and the private sector, will have to demonstrate a high degree of responsibility. So the transition is likely to a gradual one, as the Housing Authority is committed for several years ahead.

"If the future role of the Housing Authority and Housing Society is clearly defined and there is a progressive resumption of land sales then I believe the worst of residential market conditions are over. Uncertainty breeds doubt and discomfort. We need to establish a clear direction which will reflect the very different world which we are now facing," he said.

"The office market is end-user driven and the downward adjustment in prices and rents that started in 1994 is likely to continue until at least 2001, with a further decline of 30 per cent anticipated in capital values and 40 per cent in rents over that period.

"This is due to an over-supply of Grade A offices, in good locations, with some 14 million square feet due for completion over the next two years with an anticipated take-up of no more than half this figure. Vacancies are predicted to rise up to 20 per cent," he said.

The retail sector is in some disarray with significant casualties expected in the arcade type centres.

"I believe many podium developments will be converted to educational and office use, with retail taking place at the high street level or in large regional malls. It will be three years before any recovery with a further downward correction of 40 per cent in prices and rents," he said.

There are many challenges ahead for this sector as the SAR moves into the Millennium - urban renewal, the potential population explosion, the lengthy planning and land conversion, increasing aspirations, a tendency to build smaller units and the fact that the current correction is being achieved totally by asset depreciation as compared to other countries in the region where there was a currency adjustment as well as a property correction.

However, there is silver in this cloud. Thirty eight per cent of those that currently do not own their own home can now afford to buy a unit of 70 square metres in the New Territories which would cost them between HK$1.7-2 million compared to a price double that amount no less than 15 months ago.