History may repeat in Hong Kong, beware the bubble: analyst

PRSEA | Jun 28, 2011

A seasoned property watcher has a dire warning when he looks at the current property scene in Hong Kong.

“I see history probably repeating itself and a correction looming large for the market,” said Koh Keng-shing, who has more than 30 years under his belt as a property professional.

During that time Koh was in charge of the professional services desk of First Pacific Davies (now Savills Hong Kong), and later served as valuation manager for consultancy Jones Lang Wooton (now Jones Lang LaSalle), according to the South China Morning Post.

His experience now tells him that a repeat of the 1997 market collapse could be in the future.

“Weaker than expected land auctions, tightened government measures on mortgage lending and increased land supply. Does that sound familiar?” asked Koh, noting those events foreshadowed the 1997 market collapse.

Currently running the real estate agency Landscope Realty, which he founded in 1995, Koh has been a member of the Royal Institution of Chartered Surveyors since 1990.

According to Koh a key turning point was the 9 June auction of the luxury residential site on Borrett Road.
The Borrett Road site sold at below market price estimates, and for Koh was a foreboding sign of things to come. The outcome recalled the trigger point for the 1997 market decline when a residential site in Wong Ma Kok, Stanley was sold on 3 June 1997 for HK$5.5 billion (US$706 million), 16 to 34 per cent below estimates and only 6 per cent above the opening bid.

Prior to the auction, sales volumes were regularly hitting record highs, but things quickly slid downwards, driven further by a government plan to increase land supply to increase the source of new homes to 85,000 per annum.

“Now, like then, we are seeing luxury home sales beginning to slow, even though prices remain high.”

On June 10, the government announced the launch of eight sites for sale, on which it expects developers to build 6,000 flats. The move coincided with an order from the Hong Kong Monetary Authority that banks should lend no more than 50 per cent on homes valued at above HK$10 million (US$1.3 million) (down from a cap of 60 per cent).

The authority for the first time also added tougher restrictions on non-resident borrowers. Momentum is also building for the government to revive its subsidised Home Ownership Scheme, suspended in 2002. Koh said the resumption of the scheme would shorten the cycle, bringing the correction forward into the second half of this year.

“Things have certainly taken a turn for the worse,” said Lee Wee Liat, head of regional research at Samsung Securities (Asia). The government’s willingness to resume building subsidised housing for sale, together with measures targeting foreign investment demand, showed a determination to cool the market down, he noted.
“A short-term correction is now possible,”

he said.

The latest data suggest a slowing in demand. Just 21 new homes were sold over last weekend — down from the 47 homes sold over the previous weekend, according to Samsung.

Secondary transaction volumes also fell to their lowest level so far this year, with just 21 flats sold at the 10 largest residential estates tracked by Midland Realty, down from 24 the previous weekend.

Developer Cheung Kong (Holdings) has lowered asking prices at its Uptown apartment block in Yuen Long by between 5 per cent and 8 per cent, putting new average selling prices in the range of HK$5,300 (US$681) to HK$5,500 (US$706) per sq ft, noted Lee in his latest research report.

But the pessimistic views are not shared by all industry players. Among the optimists is Nicholas Brooke, chairman of consultancy group Professional Property Services.

“Although the government intervention is likely to bring about some cooling in the short term, I think once this is absorbed by the market we will see renewed activity, albeit at a slower pace, in that the reality is that nothing has changed so far as the fundamentals are concerned,” Brooke said.

“I honestly do not foresee a bursting of the bubble as many describe it, but rather a gradual calming of the market as result of the combination of government intervention at both the supply and demand end of the equation, as well as a function of the likely hike in interest rates.

“The market will probably plateau by mid-2012 and there may be some downward adjustment thereafter, but I do not see this as major, given the wide international interest in Hong Kong real estate as a long-term investment medium,” he said.