Hong Kong Luxury Property Prices Choked by Tightening

Hong Kong businessman Raymond Chiu says he has perfect credit and is prepared to spend about HK$16 million ($2 million) on a 1,000-square-foot apartment in the city’s Mid-Levels residential area. There’s just one catch. The government requires a 50 percent down payment.

That’s “really putting us off,” said Chiu, 45, who owns an information technology consulting company. “I run a business so cash flow is important. It’s frustrating because this is non-negotiable, though I have perfect credit history.”

Prices of high-end apartments, defined as those larger than 1,000 square feet or costing at least HK$10 million, have gained less than the broader market since the second half of 2012 as buyers in Chiu’s price bracket have been hardest hit after the government raised minimum down payments six times over less than three years as part of curbs to make homes more affordable.

The slowing price growth in high-end apartments is the first sign that efforts to temper rampant speculation that has fueled a surging housing market are working even as it stings luxury developers and potential homebuyers. Broker Cushman & Wakefield Inc. forecasts that prices of homes valued at more than HK$10 million will fall about 3 percent in the fourth quarter, extending a 3 percent drop so far this year, while those selling for less will be little changed.

“The luxury segment has taken the first and the most direct hit,” said Buggle Lau, chief analyst at Midland Holdings Ltd., Hong Kong’s biggest realtor by branch numbers. “The measures were aimed at driving the speculators away and they have certainly achieved that, but many people wanting to buy for their own use are also affected.”

World’s Highest

An influx of wealthy buyers from mainland China, mortgage rates close to record lows and a financial-services sector that has thrived thanks to fundraising by Chinese companies helped fuel a 250 percent increase in luxury-home prices from 2003 to the beginning of 2012, outpacing the 150 percent gain in mass-market homes, according to statistics compiled by Savills Plc. The London-based broker defines luxury homes as those with at least 1,000 square feet (93 square meters) or value of at least HK$15 million.

Hong Kong home prices are the world’s highest in a Savills survey of 10 cities, including London, New York and Tokyo. The value of luxury properties will drop as much as 5 percent in the second half after a 3.2 percent decline in the first three months of the year, according to Savills. Prices in the mass market will see no change after increasing 1.7 percent in the first six months, the broker said.

Luxury Projects

Sun Hung Kai Properties Ltd., a developer of luxury residential projects, plans to build more, smaller apartments because of a change in buyers’ appetites, Victor Lui, the company’s deputy managing director, said in September. The company, one of Hong Kong’s two-biggest developers by market value, reported lower profit from sales for the year ended in June.

There were about 86,000 luxury homes -- or units of at least 100 square meters (1,076 square feet) -- in Hong Kong at the end of 2012, according to statistics from the government. That represents about 7.7 percent of private homes in the city. About 24 percent of the 10,149 new homes completed by developers in 2012 were larger than 100 square meters, government statistics show.

The gap between the top end of the market and the cheaper bracket narrowed last year as the government’s mortgage tightening started to impact the luxury segment. Prices of mass-market homes rose 20 percent in 2012, almost double that of luxury homes, according to Savills. Prices of luxury homes began to decline after the government in October 2012 slapped a 15 percent tax on all non-resident buyers as it sought to stem the inflow of Chinese capital into the property market.

Chinese Buyers

“For a while, Chinese buyers were the main driver for luxury homes,” said Thomas Lam, Hong Kong-based research director at broker Knight Frank LLP. “When you raise buying costs for them, of course it takes away a large part of the demand.”

Mainland Chinese buyers accounted for an estimated 8 percent of private home sales in the city, a former British colony returned to Chinese rule in 1997, in the third quarter of this year, down from a record 25 percent in the fourth quarter of 2011, according to Centaline Property Agency Ltd. Since October 2010, the Hong Kong Monetary Authority, the city’s de-facto central bank, has raised the minimum down payment required for home purchases over HK$10 million to as much as 60 percent from 30 percent, and to 50 percent for those from HK$7 million to HK$10 million. The most recent round took place in February.

Mortgage Rules

That month, the government doubled stamp-duty taxes for all properties over HK$2 million, with new tax rates ranging from 1.5 percent for properties valued below HK$2 million, to 8.5 percent for those priced above HK$21.7 million.

“The extra stamp duties and mortgage rules are like progressive taxes,” said Vincent Cheung, Hong Kong-based national director of valuation at Cushman & Wakefield. “The higher the property value, the higher the tax rates and the tighter the mortgage rules. Of course this would impact luxury properties the most.”

Hong Kong’s government won’t cut back property curbs until there’s a “steady supply” of new housing, Chief Executive Leung Chun-ying said in June.

There were 607 sales of homes worth over HK$12 million in the third quarter, according to statistics compiled by Centaline. The number is the lowest since the first quarter of 2009, according to the Hong Kong-based realtor.

Frozen Transactions

“The curbs have frozen transactions,” said Knight Frank’s Lam. “The drop in prices we’re seeing is actually taken from a very small sample. I’d be very cautious about calling this a down market for now.”

The average mortgage rate in Hong Kong was about 2.17 percent in September, compared with about 3 percent at the end of 2008, according to mReferral Mortgage Services.

Chiu, the business owner, who now rents an 800-square-foot apartment in the middle-class Tsim Sha Tsui district on the Kowloon peninsula, wants to move to Mid-Levels because his daughter attends a high school in the area of high-rises halfway between the Central business district and Victoria Peak. A 1,000-square-foot unit in Mid-Levels would cost about HK$15.9 million on average, according to data from Midland.

As legacies of Hong Kong’s colonial past, the city’s most expensive residential areas, including The Peak and Island South, are on Hong Kong Island, one of the city’s three main regions and home to its financial district, government headquarters and residences of senior government officials.

Billionaires Live

On a hillside below The Peak, where global banks and companies such as HSBC Holdings Plc house their top executives, Swire Properties Ltd. last year sold a unit in a Frank Gehry-designed building for HK$455 million, a record for Hong Kong. Island South, where sea-front mansions stretch along the coastline, is home to many of the city’s billionaires, including Li Ka-shing, Asia’s richest man, and New World Development Co.’s former Chairman Cheng Yu-tung.

Prices in the established luxury areas, such as The Peak and Mid-Levels, are facing less pressure compared with “the newer luxury districts,” said Antonio Wu, head of investment at brokers Colliers International, referring to areas in Kowloon and further north of the city. “The old money is there and they usually have stronger holding power. If you cross the harbor, you’ll see more drastic price cuts because you have more supply and more speculators.”

Price Cuts

One such area is Kowloon West, where apartment projects adorned with extravagant club houses and Olympic-size swimming pools were built over the past decade as the city’s tallest building, International Commerce Centre, went up and lured investment banks, including Morgan Stanley and Deutsche Bank AG, away from Central. The ICC, completed in 2010, sits atop Kowloon Station, which helps connect the city’s international airport to the Central business district.

Sun Hung Kai last month offered to pay as much as 70 percent of the stamp duty and other charges for buyers at The Cullinan, a project in the area with average prices of about HK$25,000 a square foot, according to the project’s website. At nearby The Austin, a luxury project co-developed by Wheelock & Co., New World and MTR Corp. with prices of over HK$23,000 a square foot, buyers can get rebates of as much as 100 percent of the extra stamp duties, the developers said on The Austin’s website.

“These offers are practically price cuts,” said Midland’s Lau, who estimates such discounts can amount to as high as 15 percent of the price. “When developers do that for their new projects, it creates pressure on existing homeowners in the area to lower their asking prices if they want to sell.”

Reduced Demand

Reduced demand for more expensive units is hurting developers such as Swire Properties and Kerry Properties Ltd., which focus on luxury developments, said Alfred Lau, a Hong Kong-based analyst at Bocom International Co. Those that offer more apartments for mass-market buyers, including Cheung Kong Holdings Ltd., the other of the city’s two-biggest developers by market capitalization, and Henderson Land Development Co., will benefit, said Lau.

Shares of Swire Properties have declined 17 percent this year, while Kerry Properties have fallen 18 percent. Cheung Kong rose 0.5 percent to HK$121 in Hong Kong trading today, increasing its gain in 2013 to 1.7 percent. The Hang Seng Property Index, which tracks nine of the biggest developers listed in the city, has dropped 5.7 percent since the end of December.

“More developers will need to adjust their strategies,” Lau said. “We’ll probably see them launching projects that target the lower end of the market, or they may at least package them in such ways.”

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