Hong Kong’s property market, hit by years of high interest rates and weak demand, may be showing some signs of recovery, thanks to government measures like abolishing stamp duties and easing mortgage restrictions.

While headwinds are likely to remain for some time, property analysts suggest that the likelihood of interest rates beginning to drop over the next few months could give the sector further support.

“With the US expected to lower interest rates more actively next year, we are more likely to see a better sentiment in the residential market in 2025 for all buyers, sellers and investors,” said Martin Wong, senior director and head of research and consultancy at Knight Frank Greater China.

Slow recovery

In April, the government eliminated some measures that had been in place for years and were originally intended to cool demand in the city’s already expensive real estate markets – most notably extra stamp duties. The Hong Kong Monetary Authority (HKMA) also took steps to make mortgages more accessible, including boosting loan-to-value ratios to 70 per cent for residential properties worth up to HK$30 million and 60 per cent for more valuable properties, and from 60 per cent to 70 per cent for non-residential properties.

After the abolition of stamp duty, residential home sales jumped 114 per cent in April to 8,970 units from 4,186 in March, according to data from Knight Frank Greater China. The total for April was “the highest single-month transaction number in the past decade”, said Lucia Leung, director of research and consultancy at Knight Frank.

At the time, the measures also boosted demand and reduced the financial burden for non-local buyers.

However, the recovery is not likely to be fast, given persistent high interest rates and weak economic performance. According to Wong, the available stock may need to fall by 8,000 to 10,000 units before developers can start raising prices. That could take six to nine months.

Another challenge is that the recovery is likely to be uneven. Data from property consultancy firm Jones Lang LaSalle (JLL), for instance, showed that residential property transaction volume fell in May to 1,934 units in the primary market and 3,612 units in the secondary market.

Future sentiment

Looking ahead, the continuation of high interest rates could keep investors in a cautious mood even as developers fight to attract buyers, which could lead to lower selling prices.

Analysts expect that the end of the current cycle of rising interest rates could boost sentiment, while possible lower rates, later this year and/or into 2025 could help lower development costs, according to Cyrus Fong, executive director and head of valuation and advisory at Knight Frank.

He also suggested that properties above MTR stations could rebound first.

With rates expected to begin dropping later this year and more actively through 2025, sentiment could improve among buyers, sellers and investors, according to Wong.

A more positive sign has been the relative stability of rental markets, “which will remain robust in receiving ongoing support from incoming professionals and non-local students,” said Leung, noting that Knight Frank expects a “5 per cent to 8 per cent increase in rents for the full year for mass residential and a 3 per cent to 5 per cent increase for luxury residential.”

The outlook for luxury properties may benefit from “more demand from high-profile mainland buyers and top talent with backgrounds in the financial industry,” said Leung.

Despite the hurdles in the market, high-value transactions have continued to take place. One of the major transactions in May was the sale of a unit at Mont Verra in Shek Kip Mei, which went for HK$600 million, according to JLL in a June report. Knight Frank reported that the most notable transaction recorded in May was at 33 Island Road in Deep Water Bay, where a house sold for HK$468 million.

Commercial sector

The recovery could take a little longer in Hong Kong’s commercial market, which has been faring worse than the residential sector. Large commercial property transactions worth HK$100 million or more fell 29 per cent year on year in the period from January to May, according to Paul Hart, managing director of commercial markets at Knight Frank.

“Regrettably, interest rates are still high. The economy and retail sales are exhibiting subpar performance. As long as rents are under pressure and interest rates remain high, the investment market will continue to languish,” said Hart.

Government data showed that retail sales declined 6.1 per cent year on year during the first five months of 2024.

According to Hart, occupier demand and rental growth will need to improve and interest rates will need to drop before investor confidence in commercial markets returns.

Overall, office rents dropped by 0.8 per cent month on month in May, the 25th consecutive monthly drop, according to JLL.

According to its June 2024 report, Knight Frank expects rents for the retail market to remain flat because of poor consumer spending numbers as well as disappointing retail performance.

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