The Heydays of Nano- and Small-Size Units May Finally be Behind Us

Ryan Ip, CFA, MRICS | 14 July 2023

The Heydays of Nano- and Small-Size Units May Finally be Behind Us

As “Asia’s world city”, Hong Kong is renowned for its high efficiency stemming from its high-density development. Yet, this also comes with shortcomings, epitomised in the shoebox units and the world’s least affordable housing market. According to the 2021 Population Census, Hong Kong’s per capita living space is merely 172 square feet, much lower than Tokyo’s 210 and Singapore’s 270. The gap is even more glaring when we compare it with Shenzhen’s 300 square feet, which is nearly double that of ours.

Hong Kong Shifts Away from Nano-Flats

In recent years, Hong Kong’s high housing prices had a significant impact on market behaviours. Some developers resorted to building nano-flats measuring only 128 square feet, which were nicknamed “king-size bed” units. Nevertheless, buyers were quick to snap these up despite spending millions of dollars to purchase a home smaller than a typical car parking space (130 square feet). Ultimately, such phenomena boil down to the severe land and housing shortage in Hong Kong and the resulting demand-supply imbalances.

On a more encouraging note, however, we are seeing a clear government stance to improve living space, coupled with shifts in market dynamics stemming from favourable demand- and supply-side factors. These are signs which suggest that first-time homeowners are no longer scrambling for units with a smaller lump sum, irrespective of size, to get a foot on a rung of the property ladder.

Demand-side: mortgage rule relaxations boosting housing affordability

Against the backdrop of high housing prices, nano- and small-size units have their edge in a smaller price tag and hence downpayment. Consequently, the popularity of such units can be observed before the first quarter of 2020, as their sell-through rate is consistently above 90%, higher than that of mid-size units, i.e., those with a saleable floor area between 430 and 752 sq. ft.

The two rounds of relaxation in mortgage rules in October 2019 and February 2022 became a game-changer, making it easier for homebuyers to obtain mortgages for pricier flats. With the down payment required substantially lowered, buyers’ affordability and appetite for larger units were significantly boosted. This is reflected in the sell-through rates, as that of mid-size units overtook that of nano- and small-size units in the second quarter of 2020 and did not look back since.

Supply-side: more subsidised housing offering competitive alternatives

The increased supply of subsidised housing offered a competitive alternative to nano- and small-size units in the private housing market. With larger living space available for the same lump sum, prospective homebuyers with a limited budget, and hence at the margin of private homeownership through nano- and small-size units are inclined to turn to the subsidised housing market.

The impact on the sell-through rate of nano- and small-size units is evident, as a decline was observed during and in the immediate aftermath of the flat selection process for the Sale of Home Ownership Scheme Flats 2019 and 20204, suggesting that purchasing power was drawn away from nano- and small-size units to subsidised housing.

With more affordable homeownership opportunities becoming available, it is foreseen that some prospective buyers would choose to wait for their launch, rather than rush into the private housing market for a small unit, or even nano-flat.?

Mid-size units are set to form the bulk of upcoming completions?

Moreover, the Government made a clear stance to improve living space by announcing the minimum flat size requirement of 280 square feet in December 2021. Later in February 2022, its application was further extended. Together with the abovementioned favourable demand- and supply-side factors, changes are gradually feeding through from the sales phase to the upstream design and construction stage.

In 2022, 9,881 nano- and small-size units were built, making up 47% of total private housing completions. Based on our analysis of the latest sales brochures and building plans, we anticipate the proportion to reach its peak this year and mid-size units will form the bulk of completions after 2024.

There also are signs that developers are no longer flocking to build more nano-units. Nonetheless, the effect will be gradual as there are still units under construction that predate the minimum flat size requirement imposed by the Government in December 2021 and February 2022. Based on available sales brochures and building plans so far, we expect the trend of nano-flat completions to peak in 2023 and gradually plateau in 2024?2025.

While the heydays of nano- and small-size units may finally be behind us, there is still some way to go before fulfilling the aspirations of “living bigger”. Doing so would require tackling Hong Kong’s land and housing shortage at the root. It is thus imperative for the Government to strictly adhere to its housing supply strategy, and press on with major land development projects such as the Kau Yi Chau Artificial Islands and Northern Metropolis. These will provide a solid foundation for better living quality that is worthy of Hong Kong’s standing as a vibrant and global metropolis. ■

The Author

Ryan Ip, CFA, MRICS is Vice President & Co-Head of Research with Our Hong Kong Foundation 團結香港基金 . He is also an Independent Non-Executive Director of China Merchants Land. He is a member of the HKSAR government's Land and Development Advisory Committee, and the Advisory Committee on the Northern Metropolis. Ryan was named the Young Surveyor of the Year 2020 by the Royal Institution of Chartered Surveyors.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Proptech Institute, including its directors, employees and affiliates.

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