Hong Kong's 2024 property crisis will be like 1997's

That was just the beginning. CK Asset, known as Cheung Kong Property Holdings until it was renamed, would later send a jolt through the market when it priced Tierra Verde Project in Tsing Yi at HK$4,147 per square foot, below the market average. While the tactic helped the developer sell all 1,400 apartments on the first day, it became the first shot in the arm of a price war that would send Hong Kong’s median house price plummeting by 70 percent, a drop so severe it took six years to recover.

Tsoi, who has spent four decades in Hong Kong’s real estate industry, said he sees history repeating itself in a market in turmoil. Big developers like CK Asset have offered generous discounts since the start of the year, pushing prices down about 25% from their peak in September 2021.

“What we’re seeing today is similar” to the collapse of the late 1990s, Mr. Tsoi said in an interview with The Post. “The slowdown in transactions had started in 2019, and developers had joined the price war in the first half of this year to get rid of their inventory.”

The discount war is taking place amid a housing glut in the city. Developers launched 9,419 new homes in the first half of the year, or 87.6% of the total apartments sold last year, according to data compiled by CBRE.

The removal of so-called demand restrictions has triggered a wave of transactions. Buyers who had been waiting patiently on the sidelines have pounced, sending the value of the city’s contracted sales up 33% to a three-year high of HK$112 billion in the first six months of 2024, according to Jefferies.

This surge was short-lived, however, as newly built homes delayed by the Covid-19 pandemic were either completed or restarted. expand to 109,000 homes over the next three to four years, according to the Government Housing Bureau’s forecast at the end of March.

Developers rushed to launch their product, then outdid themselves by offering discounts to attract buyers. CK Asset, always at the cutting edge of trends Hong Kong real estate market, launched the first 138 apartments of its Blue Coast project in Wong Chuk Hang in late March in a 20 percent off to its development cost.

Prospective buyers for the Blue Coast housing project in Wong Chuk Hang at CK Asset Holdings’ showroom in Hong Kong on Saturday, April 6, 2024. Photo: Bloomberg. — Potential buyers for the Blue Coast housing project in Wong Chuk Hang at the CK Asset Holdings showroom in Hong Kong on Saturday, April 6, 2024. Photo: Bloomberg.

This first lot was sold, with 65 bidders Developers have been vying for every available unit. The record turnout has encouraged other developers to replicate the discounts. Overall, average prices for new launches in the city this year have been about 15% cheaper than previous sales in the same neighborhood, analysts say.

“We are still facing an abundant supply of new apartments in the short term,” said Norry Lee, JLL’s senior director of project strategy in Hong Kong.

About 40,000 new homes are available this year, including 23,000 existing units on the market and another 20,000 units that will be ready for launch, Lee said.

“Prices will only stabilize when inventory drops to around 20,000 units,” meaning developers have found themselves in a comfortable enough cash position to start raising prices again, Lee said.

Has Hong Kong’s Slump Found a Low Point?

Some analysts see signs of a pause in the price war. “Big developers are no longer cutting prices (or) pursuing their targets because they have generated enough cash” from sales tactics in the first half, said Mark Leung, a UBS real estate research analyst in China.

Aggressive discounts were also the bait used by developers to test the market, attract outside buyers and generate buzz.

“The low prices only applied to a portion of the units in (many) projects because (developers) wanted to sell them first to gauge buyer sentiment (before) raising prices for the remaining units,” said Chau Kwong-wing, director of the Ronald Coase Centre for Property Rights Research at the University of Hong Kong.

Potential buyers of the Pavilia Forest project in Kai Tak at the sales office of New World Development at Kingston International Centre in Kowloon Bay on 13 July 2024. Photo: Edmond So. — Potential buyers of the Pavilia Forest project in Kai Tak at the New World Development sales office at Kingston International Centre in Kowloon Bay on July 13, 2024. Photo: Edmond So.

A perfect example is the Pavilia Forest I project, which overlooks the typhoon shelter of the former runway of the old Kai Tak Airport.

The first 60 apartments were launched at HK$17,188 per square foot in early July, about a third less than the neighbouring Monaco Marine project launched in April at HK$24,833 per square foot. The initial sale received 20 offers for each available apartment, helping the developer rake in HK$1.7 billion in revenue over nine days.

Prices have increased over subsequent sales batches, with the recent launch of Azure Forest valued at HKD 19,242 per square foot, more than 10% higher than the first phase.

“I don’t think developers wanted to liquidate all their assets and exit,” Chau said. “Most of them are holding their portfolio (without) influencing their financial position because of the outlook, and they need to prepare their holding power for the medium and long term.”

Phase II of the Hong Kong discount war

Hong Kong’s property price war is in its second phase, involving mostly small developers relying on sales to generate cash. “The disruption to the market is insignificant,” said UBS’s Leung.

Lesser-known developers that don’t have the massive marketing budgets of their bigger rivals have to resort to discounts as the only way to attract attention, said Will Chu, senior research analyst for Hong Kong and China real estate at CGS International Securities.

“For them, this is the only way to get money and repay their debts, rather than holding their stocks and paying high interest,” Chu said.

Continental Properties has had to cut the price of its Cheung Sha Wan project by 17% after its apartments remained unsold for two weeks after its launch in late June.

Some Hong Kong developers even resort to stealth discounts, offering cash rebates of up to 50%.

Hong Kong’s property market, one of the world’s most expensive, still faces downward pressure in the short term, but what lies ahead is not all bearish, analysts say.

The Centaline Property Agency’s Centa-City Leading Index (CCL) continues to correct, with June’s figure falling 1.3% from the previous month to 142, a 3.9% drop this year.

Consulting firms and banks generally expect home prices to fall 5% to 10% this year because of high inventory levels and interest rates. Mortgage rates won’t fall until 2025, even if the Fed starts cutting rates this year.

JLL’s Lee said it would take about 18 months to digest the action with a rate cut expected in the second half, based on the expectation that first-party transactions could reach 16,000 to 18,000 for the full year.

The real estate market saw a surge in property transactions as soon as the government lifted all real estate restrictions in late February due to pent-up demand, but the demand was consumed and momentum waned earlier than expected, experts said.

The recent slowdown is due to uncertainty about interest rate developments and also banks’ caution in lending, they said.

“Banks tend to be more selective with borrowers and focus on quality over quantity,” said Eddie Kwok, executive director of valuation at CBRE. “We expect banks to further increase the risk premium by raising the mortgage rate for lower-quality assets.”

But strong leasing activity could support asset yields and attract investment demand, helping drive longer-term sales, Chau said.

Demand for the rental market will continue to grow as more students and talents from mainland China arrive in the city through various programs, which is expected to push up rents, he said.

“This can reduce the short-term downward pressure on property prices,” he said, adding that rental yields need to exceed 4% to stabilise property prices.

Will Chinese Newcomers Save Hong Kong Real Estate?

Buyers of Mainland China Property investors are a force to be reckoned with in Hong Kong’s real estate market. They spent a record HK$70.5 billion in the first half of the year, up 42 percent from last year, on new and occupied homes, according to Centaline Property Agency, one of the city’s largest real estate consultancies.

Housing demand still has room to grow and new supply will start to decline from 2026, with the market adjusting the supply itself, the UBS real estate analyst said.

The roller coaster ride of 26 years ago may not be repeated this time because the cost of money is higher today, analysts warn. Mainland China’s economy is growing at half the rate of two decades ago, limiting the positive spillovers for Hong Kong, they say.

“It’s not surprising that housing prices will rise between now and then, but the economic environment needs to be taken into account,” Leung said. “Developers have been actively bidding for public land, which shows they are not too pessimistic about the outlook.”

All in all, there is reason for optimism, said Tsoi, who has weathered boom-and-bust cycles in the world’s most expensive real estate market.

“I’ve been through the ups and downs for decades and I know the market goes through cycles,” he said. “Real estate prices are going to go down this year, but now is the time to buy. When the market rebounds, you’ll have missed the best opportunity.”

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