Hong Kong’s rise since 1997 to become a key global financial centre, has been meteoric. So too has occupier demand and buyer confidence in the city’s residential real estate. Consequently, price growth has also been spectacular, despite experiencing a temporary knock by the global banking crisis of 2008. This price growth has been marked across all sectors, but it is particularly strong for ultra-prime property, which is both limited in supply and a “must have” for newly wealthy billionaires from the mainland.

Cash-rich buyers have buoyed all sectors of the market. While genuine occupier demand, evidenced by rental increases, is strong, demand for the purchase of trophy assets is stronger still. There is huge demand for investment properties from the Chinese mainland, coupled with restricted supply so rental growth has not kept pace with capital growth – even though leasing supply is limited. Yields have fallen significantly since the end of 2008 and currently stand at 2% gross for prime properties. This is low even by the standards of prime markets in other world cities.

Overwhelming demand

Despite attempts to introduce cooling measures, strong interest in traditional areas means that luxury prices in Mid-Levels, Southside and The Peak continued to outperform other markets. The extreme scarcity of prime houses on The Peak (there are fewer than 100 detached residences) is perhaps an exaggerated caricature of the fundamental problem affecting all world class cities; there are just not enough of the most desirable properties to go round.

Overwhelming demand for property at the very top of the market is setting global records, but it has undoubtedly been dealt a blow by the recent announcement of punitive stamp duty levels, particularly for overseas residents and those holding property for shorter periods of time. Capital values in Hong Kong remain buoyed by strong demand for real assets, despite very modest growth in underlying rental values. Government intervention and the tight availability of mortgage loans in 2011 resulted in short-lived price falls. The Hong Kong residential market then saw something of a rebound in the first half of 2012. We may see the same thing result from the new cooling measures.

Hong Kong shows how the weight of money (in this case from mainland China as well as wealth generated in the city) comes to bear on a limited geography. Alongside Singapore, and to a much greater extent, Hong Kong illustrates the dizzying heights that some Asia Pacific markets have reached. Hong Kong is the most expensive city in the world for prime real estate.

Dizzying heights

This makes stable, “old world” European and North American cities look very good value – especially to Hong Kong residents and investors but also to other new world buyers. The stamp duty measures also serve to preserve London’s relative value — despite hikes there, and the threat of a “mansion tax.”

Cooling the market

Hong Kong has introduced a number of measures to cool its residential markets, with new taxes specifically targeting overseas buyers. It is the weight of money from these markets — most notably China — that has established Hong Kong’s residential real estate as the most expensive in the world.

The city’s most recent measure has been to introduce a 15% stamp duty on overseas buyers. This is on top of a stamp duty that ranges from 1.5% on properties under HK$2 million to 8.5% on properties valued over HK$21.7 million. The city also penalises those selling within three years with further duties. These charges range from 10% for properties held for more than 12 months but less than 36 months, to 20% for properties held for under six months.

This marks the ninth round of cooling measures the Hong Kong government has implemented since 2009, and to date, markets have proved to be resistant. The rate of price growth has moderated and volumes have fallen to a degree, but wider adverse effects have been limited. A low interest rate environment, ample liquidity, and limited availability of stock, has continued to put pressure on prices; fundamentals that will continue to sustain the market going forward.

Taken from
Candy Global Prime Sector Report