10 May 2016 (Hong Kong) – In Hong Kong, even with the threat of a significant US interest-rate hike diminishing, given the on-going Government cooling measures and large amount of future supply, potential homebuyers are expected to adopt a wait-and-see approach. Total home sales volume for 2016 is expected to drop to around 50,000. Meanwhile on the mainland, the residential market has started to improve in the first quarter of 2015, with a rebound in home prices. Home prices are expected to grow further in 2016, albeit at a slower pace as government measures are cooling surges in the first-tier cities.

At a press conference held in Knight Frank’s Hong Kong office this afternoon, Thomas Lam, Senior Director and Head of Valuation & Consultancy, together with David Ji, Director and Head of Research & Consultancy, Greater China, reviewed the Hong Kong and Mainland property markets in the first half of 2016 and presented their forecasts for the second half. 

Mainland China residential market

• To support both the slowing economy and the sluggish property market, the government has introduced a series of easing policies since last year, including interest-rate cuts, the lowering of required reserved ratio for banks and a reduction of mortgage requirement for second-home buyers.
   
• As a result, mainland’s residential market started to improve in the first quarter of 2015. In March 2016, 62 of the 70 major cities surveyed recorded month-on-month price increases compared with only 12 a year ago. Home prices in first-tier cities, in particular, recorded a strong growth, with Shenzhen seeing a 62.5% year-on-year home price increase, followed by Shanghai, Beijing and Guangzhou.
   
• The government has adopted a diversified policy approach for different cities, to curb property price surge in first-tier cities and continue to boost home sales in lower-tier cities. For example on 25 March, Shanghai raised minimum down-payment ratio for secondary homes, to curb the surge in home prices. The eligibility for non-local homebuyers was also tightened.
   
• Looking ahead, the People's Bank of China (PBOC) is expected to further cut interest rate and required reserve ratio in 2016. Other relief measures such as the lowering of Loan-to-Value Ratio and reductions of transaction taxes are also expected in 2016. 
   
• David Ji, Director, Head of Research & Consultancy, Greater China at Knight Frank, is cautious about the outlook for the Mainland housing market with housing inventory lowering and completion levels stabilising but economy slowing. Meanwhile, the best-performing cities are expected to be among the first-tier cities. Cities along the “One Belt One Road” route, in particular, are also likely to see promising development, benefitting from policy support.

Mainland China residential price 2016 forecasts

Source: Knight Frank Research

Hong Kong property market 

Residential:

• While Government’s cooling measures are still in place, a potential US interest-rate hike and abundant housing supply in the pipeline have prompted potential buyers to adopt a wait-and-see approach. This has led to subdued property sales transactions in recent months. Thomas Lam, Senior Director and Head of Valuation & Consultancy, expects total home sales volume for 2016 to reach around 50,000, a record low in nearly 20 years. 
• Hong Kong’s home prices peaked in September 2015. In mid-2016, it is estimated that mass and luxury residential home prices will have dropped by 11% and 7% respectively from their peak levels in September last year.
• The market shows a polarisation trend, with the super-luxury sector outperforming, thanks to Mainland buyers who continue to seek buying opportunities for super-luxury properties, despite the on-going implementation of the Buyers Stamp Duty policy, due to their extremely limited supply and prestigious status. 
• Looking ahead, there will be around 108,000 units of new-home supply coming on line from 2016 to 2020, representing about 21,600 units per year on average. Most supply will be in the New Territories, clustering in Yuen Long and Tseung Kwan O. It is expected to bring downward pressure to second-hand home prices in the areas. Meanwhile, in Kowloon, supply will concentrate in Kai Tak. In 2016, new-home supply could reach about 38,000 units.
• The Federal Reserve raised the US interest rate for the first time in December 2015, the first rise in nearly a decade. It is expected to increase the rate by another 25-50 basis points in 2016. However, significant drops in Hong Kong’s home prices are unlikely as the impact on household mortgage repayment remains insignificant.
• The Hong Kong government is still taking a wait-and-see attitude towards the relaxation of market cooling measures, despite the recent drops in home prices. It is unlikely to lift the tax measures until home prices have fallen significantly. Meanwhile, to effectively increase residential supply, Thomas Lam believes that the government should introduce alternative incentives to developers, such as plot ratio increment and building height restriction relaxation, to speed up development.

Office:

In the Grade-A office market, increasing supply will stifle rental growth in Kowloon East. Meanwhile, Grade-A office rents on Hong Kong Island are expected to increase 5% this year, due to the low vacancy rates, while those in decentralised areas could drop 5% in 2016.

Retail:

Hong Kong’s retail industry is seeking new elements and new angles to rebalance business, to reduce its dependency on Mainland visitors spending. The re-adjustment process is expected to continue this year. Rents of prime street shops will continue on their downward path this year, while shopping centre rents will remain firm, with mild increments, especially those in non-core shopping areas focusing on mid-end products and necessities.