Why overall private residential transactions are losing ground, and occupiers seem keener to rent than buy

Financial Secretary Paul Chan Mo-po, mentioned the supply of residential units in the Legislative Council last week. He said that at the end of March 2022, it was estimated that the total supply of first-hand private residential units in the next three to four years would increase to a record high of 99,000 units. The average annual completion of homes between 2022 and 2026 is expected to exceed 19,000 units, an increase of about 14% over the past five-year average.

In other words, the total number of completions in five years would be 95,000 units (19,000 units per year). I compared the official completion volume from the Rates Valuation Department (RVD) by splitting them according to the years 2022, 2023 and 2024. The forecast completion volume in 2022 will be 22,851 units and 21,848 in 2023, accounting for 44,699 units. In the remaining 2024-2026 period, some 50,301 units will be completed, averaging around 16,767 per year, showing a decline compared to this year and the following two years.

The “Hong Kong Property Review Monthly Supplement" released by the Valuation Department in June showed that private home completions rebounded after falling for two consecutive months. In April, 1,896 private homes were completed, a monthly increase of about 150%, and the cumulative number for the first four months of this year increased by about 140% compared to the same period last year. The figure was a new high for at least 21 years during the same period.

In the first four months of this year, the number of completed private units totalled 9,979, up about 1.4 times YoY from 2021’s 4,112. It also means that the figure has reached about 44% of the private-home completion target (22,851 units) for the whole of 2022 previously forecast by the Valuation Department.

As of April 30, this year, Type A units (with a saleable area of about 431 sq. ft. or less) still accounted for most completions, at 5,684, followed by Type B units (about 431 to 752 sq. ft.), at 2,650. Class C units (about 753 to 1,075 sq. ft.) accounted for 926 units, Class D units (about 1,076 to 1,721 sq. ft) accounted for 495 units, and Class E units (of around 1,722 sq. ft. or more), had only 224 completions.

Private flats completed and forecast to complete in 2022

*till 30 April 2022 (Source: RVD)

When I divided the figures by district, the New Territories are still the critical areas for new supply. In the first four months, 6,772 units completed in the New Territories, accounting for about 67.9% of the total. Kowloon, with 2,055 units, accounted for about 20.6%, and Hong Kong Island saw 1,152 units completed, accounting for about 11.5% of the total. The district volumes more or less align with the annual forecast. According to the RVD report, 65% will come from the New Territories, of which Sha Tin and Yuen Long will supply 19% and 13%, respectively. In 2023, the New Territories will have 49% of the total supply, with Yuen Long snagging 19% of it.

Due to residential prices’ recent limited appreciation, if newly acquired pre-sold units were purchased for investment purposes, owners may have to wait out the three-year special stamp period, or their profit margins may be limited. Investors tend to put these homes up for lease. We have seen 65 leases in the newly completed The Grand Marine in Tsing Yi, where asking rent starts from HKD11,800. Meanwhile, Ocean Marini in Lohas Park, Tseung Kwan O, which is about to be completed, supplies 503 homes, of which more than 50 – mainly two or three-bedroomed – are rented out. The current minimum entry rent for the property is HKD16,000.

When we look at private residential transactions in the last five months, the volume is down 37.1% YoY from the same period in 2021. Primary sales volume fell 44.1%, and secondary sales dropped by 35.5 %.

Comparison of overall private residential transactions in 2021 and 2000 (from Jan to May)

Sources: Midland Research?

Now that the Fifth Wave of the COVID-19 pandemic is ebbing, the residential market is showing signs of recovery. However, the stock market still feels the effects of the Russo-Ukraine war and currency devaluation. It is not hard to foresee several interest rate increases in Hong Kong. Potential end-users will likely wait for news about the new Chief Executive’s housing policy and probably stick to leasing for a couple of years.

Lohas Park is one of the popular newer large-scale developments with more than 23,000 units. After a large shopping mall, The Lohas, offering more than 480,000 sq. ft., opened on 1 November 2020, many people were keen to lease in the area. According to Centaline Agency’s record, from January 2022, until 10 June 2022, some 578 apartments had been leased in Lohas Park.

Wheelock’s Ocean Marini, Phase 9 of Lohas Park, is ready to be occupied. It originally had around 50 units to let, mainly two to three-bedroomed, but as at May 31, only seven remained, with an average rent of HK$31 per sq. ft. pencilled in. The average rental yield is reasonable, ranging from 2.3 to 2.5%. Ocean Marini recently had more than 50 units up for rent, mainly two to three-bedroomed units.

The current minimum entry rent for these units is HKD16,000. By checking the seven remaining units, we can see low-rise flats without sea views generally command higher rental yields. Tenants generally focus on cost and are not keen to lease high-rent units in high-rises with open views.??

Rental cases in Lohas Park (Jan to 10 June 2022)

Source: Centaline Agency

The appetite to buy flats has been replaced with a desire to lease. According to EPRC’s record, there have been around 396 acquisitions in the past five months, 31,5 less than rental transactions. What caused this? It may be that buying flats now is too expensive. Two to three-bedroomed units in Lohas Park cost HK$8.2 million to HK$18 million, while rents start from HKD15,000 and reach HK$40,000.

I made some assumptions (2% interest rate, 30-year tenor and a mortgage of around 60%) to compare monthly repayments between buying and renting, including all the extra costs that come with buying. After estimating the total expense for the conveyancing process, the cost of buying can support around 36 months’ rent.

Comparison of total expenses in different price ranges (HKD8.2 million to HKD18 million)

????????Source: 28hse.com

Mortage insurance premium (HK$)

Monthly repayments according to various tenors

Source: HKMC

The robust demand for bigger flats continues; now, entry flats are more than HKD8 million to HKD10 million. However, the residential market is easing into stability, but there are still some uncertainties which will leave buyers in a cautious mood.

For now, many are willing to rent rather than buy. First-time buyers must be aware of acquisition costs before taking the plunge. Traditional estates and new developments are always popular and are secure enough to withstand any pandemic-induced depreciation.

Thank you