Unchecked Imbalance

November 17, 2007

It’s always been said Hong Kong has a chronic shortage of supply of luxury properties, and this accounted for the stratospheric prices of these rare species. But how serious is this supply – demand imbalance?

Let’s look at the supply side first. At the end of 2006. there were 77,541 large units (defined by the Government as Class D units and Class E units*) in stock. The forecast supplies of large units in 2007 and 2008 are 1.420 and 2,370 units respectively, representing 1.8% and 3.1% increases on the existing stock (demolitions excluded). Of the total stock of 77, 541 units, 41,114 units (53%) are on Hong Kong Island. A breakdown of Class D and Class E units shows the respective stocks at 54,778 units and 22,763 units, of which 25,737 Class D units and 15.377 Class E units are on Hong Kong Island. The forecast supplies in 2007 on Hong Kong Island made by the Government are 179 Class D units and 197 Class E units, with 2008 forecast reduced to less than half for the two classes.

According to a recently released survey by Capgemini Group and Merrill Lynch, 87,000 people in Hong Kong are US-dollar millionaires, and their average net assets are at US$5.4 million or HK$42 million (the survey defines a US-dollar millionaire as an individual with more than US$1 million in net assets, excluding his or her primary residence and consumables). Only last year. 9.000 people joined this rank thanks to the buoyant stock and property markets and the booming economy. Hong Kong is also home to 1.330 “ultra-millionaires”, whose net asset per person is more than US$30 million or HK$234 million, the survey found. In addition. Hong Kong is also an ideal city for those nouveaux riches in China, whose affluence is more evident in the local luxury property market. These people have become a significant buying force in the top end market, especially in the house submarket where they account for almost half of the sales in the last 18 months.

With this potential demand in place, the supply of new and old luxury properties in the market is in severe scarcity. According to Landscope research, on Hong Kong Island alone, the ratio of number of people who can afford to buy large units to the stock available for sale (many large units are for lease only) is 2.5 :1; and this ratio is skewed steeply to 5:1 in Class E (2.000 square feet and over) submarket. If we take into account the tens of thousands of expatriate executives who take up more than half of the leasing stock in Class E units, the units available for sale is more limited. The imbalance is exacerbated by the fact that many owners have withheld their sales stock in anticipation of more price growth amid buoyant economy. All this explains the phenomenal price hike in the luxury property market in recent years. In Island South and The Peak, which are the two most expensive residential locations in Hong Kong, large apartment prices have increased by 15% in the last three months alone, and 20% price gain is recorded in the house submarket in the districts in the same period. Other districts also saw prices edged up as a result, with Midlevels Central and Kowloon Station becoming bright spots after Island South and The Peak.

No new supply on the horizon is significant enough to quench the thirst of the eager buyers, who are undaunted by the successive raises of price thresholds. The result is old price records being broken almost daily. While small flats are still selling at 60% to 70% of their 1997 prices, large units have already surpassed their prices 10 years ago, and houses on Hong Kong Island are trading at 150% to 200% of their 1997 values. If the recent corrections of the stock market will not turn into a persistent downward trend, we foresee prices of large units to continue to climb. For large houses in Island South and The Peak, the sky’s the limit. It will not be long before Hong Kong reclaims the top position in the league of the world’s most expensive real estates.

* Class D units have saleable area at or over 1,076 square feet and Class E units are at or over 1,722 square feet. In terms of gross floor area which is more commonly used in the market, they are translated into 1,300 square feet gross and 2,000 square feet gross respectively.

By Claudia Hui