Market Polarisation

June 20, 2007

Despite what property developers say in public, the government land auction results are the best interpretation of what they really think. In the last three land auctions. the final sales prices were in the low range of market expectation before the auctions.

One site at Hoi Wang Road in West Kowloon was sold in May for $4,000 million, close to the lower end of the forecast range ($3,900 to $5,200 million). Another site with a much better harbour view at Hoi Fai Road in the same district was sold last week for $5,560 million, at the lower end of the forecast ($5,600 to $6,600 million). Two other lots sold in May fared better, only because they were earmarked for luxury residential developments. So the indication is clear enough.

Developers’ “talk up” campaign before the auctions only served to demonstrate their eagerness to offload unsold stock. And, unlike many of the previous auctions, mass residential prices did not respond positively after the hammer fell. Both primary and secondary sales markets experienced strong resistance when price edged slightly higher. So sales remained in the doldrums. This is a stark contrast to the luxury market, which seems to have gathered more momentum when the stock market picked up again in the last two weeks. Although we forecast that more dampening measures will be introduced by the Central government in its effort to cool down the overheated mainland stock market frenzy which will have impact on Hong Kong stock market. players in the luxury residential sector have largely ignored such potential risks or have assumed the property market would be immune from it all.

As summer approaches, high end residential leasing is booming on increased new arrivals and upgraded housing budgets for multinationals. The economic growth is set to continue for the foreseeable future, thus strengthening corporate confidence. As with last year, expat-popular properties are leasing fast and stocks are drying up, placing more upward pressure on rentals. Therefore we expect to see rentals recording a 20% increase year-on-year when the peak season draws to an end in late August.

By Claudia Hui