Hong Kong Property Market Enters A Great Stagnation

Hong Kong’s property market has long been a major source of wealth. The city’s billionaire ranks are dominated by developers who got rich by acquiring sizable land banks that allowed them to manage land costs and boost profit margins. But recently, a tussle over valuations between those developers and the government, which is the largest seller of land, has resulted in a stalemate that dampens the city’s economic prospects.

At the apex of the market sits the Hong Kong government, which owns all the city’s land and, in the past, has relied on the sale of land leases for more than 50% of its revenue. It is having difficulty finding takers for the 18 parcels of land it earmarked for sale this year. The MTR Corp, which is a major landlord in addition to operating the city’s extensive rail network, received no bidders for its latest land development project near the airport, the first time this has happened in ten years.

The deals that have taken place were at bargain rates. “This lackluster showing provides yet another chastening indicator of how far Hong Kong’s investment market has fallen from its heights four or five years ago,” said Benjamin Chow, head of Asia real assets research at MSCI, whose team tracks acquisitions around the region. “The aborted tenders also illustrate the widening chasm in pricing expectations between buyers and sellers, which has plagued not just traditional commercial sectors like offices and retail, but also the land sales market as well.”

Meanwhile, land lease sales, offered by both government and private players, have fallen to their lowest levels since 2009, according to MSCI. In the government’s case, Chow said, it is not just due to the developers’ lack of appetite to bid, but also the government’s decision not to sell at bids below its assessed values.

Of the two land sites the government managed to sell this year, one was valued in September at HK$5,392 per square foot in Kowloon’s Kai Tak area near an MTR station, down from more than three times as much for a nearby site barely four years ago, at HK$17,600. It was the lowest value in Kai Tak since 2014.

The other site, at a prime location in Hong Kong Island’s Kennedy Town, was sold in July at HK$7,071 per square foot, the lowest value since 2002 for property in the same neighborhood, according to data from industry consultancy JLL.

A developer who asked not to be named described the situation as a downward spiral caused by a triple whammy, inflicted by the local currency’s dollar peg, along with rising interest rates and a worsening consumer appetite.

In a note on the government’s land lease sales, JLL said that the recent discounts suggest that “developers remain conservative on land price bidding, considering the subdued market sentiment and rising construction and financing costs.”

Shih Wing-Ching, founder and chairman of Centaline, the city’s largest residential property broker, acknowledged that a few local property investors are under financial duress, such as the family of former billionaire Tang Shing-bor, known as “Uncle Bor,” who passed away during the Covid pandemic.

However, Hong Kong generally does not suffer from the overbuilt inventory and over-leveraged debt loads that plague the mainland Chinese market. “Overpricing is the only problem in Hong Kong’s property market; it’s easier to deal with,” he added.

Chow, of MSCI, pointed to the restraint exercised by the city’s top eight developers in their land acquisitions in recent years. Their purchases declined to $804 million in the first half of this year, after peaking at $13.8 billion in the first half of 2019.

Another saving grace for Hong Kong is the low penetration of mainland developers. “Mainland developers’ projects in Hong Kong have to go through local agents for sale; we are one of the biggest. Their impact in Hong Kong is not big because their market share is very small,” Shih said.