Briefi ng Residential sales August 2017

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Savills World Research Hong Kong Briefi ng Residential sales August 217 SUMMARY Buoyant market sentiment has propelled luxury prices to historical highs.

1 Savills World Research Hong Kong Briefi ng Residential sales August 217 SUMMARY Buoyant market sentiment has propelled luxury prices to historical highs. Image: Plantation Road, The Peak Luxury sales volumes rebounded over the second quarter as the Hang Seng rose and real interest rates remained low. The few luxury launches available in the primary market gathered pace. Both townhouse and luxury apartment prices continued to rise to reach new heights. Looking ahead, luxury prices are expected to rise further this year even as the current rally begins to look rather frayed. While there are some parallels between today and 1997, the chances of a similar crash in property values remains unlikely without an external shock of the kind which precipitated crises in both 1997 and 28. In today's market there are some obvious similarities to pre-crisis 1997 with record prices and low levels of affordability. Despite this we are unlikely to see a market crash but a cyclical peak looks to be within sight. "Luxury sales volumes rebounded in Q2 on the back of a rising stock market and low real interest rates. With the impact of new restrictive measures receding and supply remaining tight, luxury prices look set to head north over the remainder of 217." Simon Smith, Savills Research savills.com.hk/research 1

2 y 217 Overview Luxury volumes rebounded on the back of a booming stock market, which saw the Hang Seng Index rising from 24, in early April to 27, in mid-y. The low interest rate environment remains, and local banks continue to offer attractive mortgage packages even as the US Fed has raised interest rates four times since the end of 2. Luxury transaction volumes on Hong Kong Island and in Kowloon / New Territories reached 22 and 269 in Q2/217 respectively, a 44% and 55% QoQ increase. While the number of luxury primary launches in Q2 were fewer than during recent quarters, the projects which are on the market saw increased sales momentum. On Hong Kong Island, after selling a batch of six units for HK$758.8 million in /217, Altamira in Mid-Levels West saw another four units sold in June and y for over HK$ million each. Across the harbour, the launch of Parc Inverness in Kowloon Tong towards the end of April received an overwhelming response with 79 of the 96 first launch units sold within a day, and a total of 9 units sold within two weeks of launch for an average price of HK$24,18 per sq ft saleable. The developers subsequently launched the remaining 44 apartments and 5 houses for tender. The townhouse market was not as active, but we still saw transactions in both the primary and secondary markets: Mount Nicholson remained the highlight of the luxury primary market with another house sold for HK$ million (HK$82,89 per sq ft saleable) while a house in Shouson Peak was sold first hand for HK$ million (HK$88,952 per sq ft saleable). Though there were not many new launches of houses, there were two separate house / site transactions recorded in Kowloon Tong over the quarter; Stafford Road (HK$22 million) and 6 Cambridge Road (HK$2 million). Spurred on by the buoyant market sentiment and rebounding GRAPH 1 Luxury apartment price indices by district on Hong Kong Island, /23 Q2/217 /23 = 1 GRAPH 2 Luxury transaction volumes by district on Hong Kong Island, /2 Q2/ Happy Valley / Jardine's Lookout Mid-Levels The Peak Pokfulam Southside Source: EPRC, Savills Research & Consultancy GRAPH 3 Townhouse price indices by district, /23 Q2/217 /23 = Mid-Levels Pokfulam The Peak Happy Valley/Jardines Lookout Southside/Shouson Hill Peak Southside Q2 savills.com.hk/research 2

3 August 217 transaction volumes in both the primary and secondary markets, Hong Kong Island and Kowloon / NT apartment prices all continued to rise in Q2, registering 6% to 7% growth over the first half of 217. The widening price gap between primary and secondary luxury products, which in some areas can be as high as 5%, should lure some purchasers back to the secondary market to look for bargains over the coming months. The only problem for them will be to find a willing seller, a difficult task in today s market given rising prices and escalating transaction costs. Looking ahead, with luxury prices at historical highs, we suspect that after a multi-year rally the market is beginning to near its peak. The vast difference between primary and secondary pricing may induce some further catch-up in prices in some traditional luxury enclaves over the next few months, however, pushing average values up further in the short term. GRAPH 4 Kowloon and the New Territories luxury residential apartment price indices by district, /23 Q2/217 /23 = 1 Kowloon Station Ho Man Tin Kowloon Tong Sha Tin/Tai Po Sai Kung/Clear Water Bay GRAPH 5 Luxury transaction volumes by district in Kowloon and the New Territories, /2 Q2/ Tsim Sha Tsui Ho Man Tin Kowloon Tong Shatin/ Tai Po Sai Kung Q2 Source: EPRC, Savills Research & Consultancy TABLE 1 Luxury residential price changes Sector Q2/217 / Townhouses 2.6% +4.2% +5.5% +8.3% Hong Kong Island luxury apartments 2.6% +4.3% +6.9% +9.3% Kowloon luxury apartments.7% +4.8% +9.5% +5.3% New Territories luxury apartments 2.4% +3.8% +6.6% +6.2% savills.com.hk/research 3

4 August vs Are conditions right for another market crash? Hong Kong recently marked the 2th Anniversary of the 1997 Handover of the territory from Britain to China and thoughts also turned to the Asian Financial Crisis which unfolded in the same year. What began in Thailand with the collapse of the Thai Baht soon spread to elsewhere in the region, including Hong Kong. A speculative attack on the Hong Kong Dollar peg resulted in higher overnight interest rates and a falling stock market. It was ultimately a war which the government won but other factors compounded uncertainty in the property markets including tighter lending conditions, higher interest rates and a pledge by the new administration to dramatically increase the supply of residential apartments. At a time when prices were at record highs, affordability at record lows and speculation was rife, greed quickly turned to fear and office, residential and retail prices fell 71%, 6% and 52% respectively from 1997 to 23. The question today is whether conditions mirror 1997 and we are faced with an imminent property crash of a similar magnitude. Some data certainly harks back to the mid-9s; record high prices, poor affordability (measured by the ratio of average prices to household incomes) and the prospect of higher supply levels alongside elevated interest rates over the next few years. So will we see a property price correction of a similar scale to the 1997 to 23 period? Despite the parallels, other areas of the market still look quite robust; real interest rates remain in negative territory, gearing levels are conservative, supply levels will remain constrained for many years, liquidity is plentiful and even the banks have been hardened to better resist any future credit crisis. Government has also introduced a slew of measures to discourage overseas buying, contain rising prices, moderate lending and curtail the speculative excesses of the past. GRAPH 6 Average supply levels will start to rise Residential supply (all classes), E 45, 4, 35, 3, 25, 2,, 1, 5, Average Supply: 29,894 Class A Class B Class C Class D Class E All Classes Average Supply: 1,925 GRAPH 7 The price-to-income ratio is flattening No. of sales agreements vs price to income ratio, 1996 /217 No. of primary sales agreement (LHS) No. of secondary sales agreement (LHS) Price/household income (RHS) 16,,, 1, 8, 6, 4, 2, Source: Lands Department, Rating and Valuation Department, Savills Research & Consultancy GRAPH 8 High housing prices aren't supported by volumes Total no. of sales agreements vs price index, 1996 /217 Units Thousands Transaction volume (LHS) Source: Lands Department, Rating and Valuation Department, Savills Research & Consultancy Inflation Adjusted Residential Property Price Index (RHS) =1 savills.com.hk/research 4

y 217 217 vs 1997 - Are conditions right for another market crash? Based on the fundamentals then, it is difficult to make a case for a sudden, sharp correction in values.

As for a crash, in the past those have been brought about by events beyond these shores and by weaknesses which no one saw or predicted.

debated. If the past is anything to go by, it s the unknown unknowns which should keep us all awake at night. GRAPH 9 Are real interest rates about to turn positive?

5 y vs Are conditions right for another market crash? Based on the fundamentals then, it is difficult to make a case for a sudden, sharp correction in values. A greater likelihood is that values will soon peak as we complete a 9th year of price rises followed by a period of relative stability. As for a crash, in the past those have been brought about by events beyond these shores and by weaknesses which no one saw or predicted. Today, the most often cited cause for concern is the rise of non-bank financial intermediaries operating beyond government control, but at least these risks have been identified and are widely debated. If the past is anything to go by, it s the unknown unknowns which should keep us all awake at night. GRAPH 9 Are real interest rates about to turn positive? Real interest rate vs price index, 198 / = Source: Rating and Valuation Department, HKMA Real Interest Rate (RHS) Price Index (LHS) Rate % Please contact us for further information Residential Services Residential Development & Investment Savills Research Keith Chang Managing Director Savills Realty kchang@savillsrealty.com.hk Patrick Chau Senior Director pchau@savills.com.hk Simon Smith Senior Director Asia Pacific ssmith@savills.com.hk Jack Tong Director jtong@savills.com.hk Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 7 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. savills.com.hk/research 5

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