Empty homes forcing Hong Kong developers to cut prices

HONG KONG – Hong Kong’s property developers are racing to sell homes with a tactic they have not had to use for years: deep discounts.

Real estate companies are cutting new home prices,

pummelled by a weak economy and rising interest rates.

Buyer hesitancy is so strong that even deeply discounted foreclosure auctions attract few bidders.

Data from Centaline shows that 20,483 new properties were vacant in the third quarter – the most in nearly two decades.

CK Asset Holdings, owned by tycoon Li Ka Shing, was one of the first to bow to the new reality when it offered its Coast Line II project in the Yau Tong area at prices not seen since 2016. The strategy worked – the project was oversubscribed by more than 30 times.

The overwhelming response, compared with the relatively lacklustre market, sends a clear message to CK’s peers that a real estate reckoning is here, and discounts are inevitable.

Hong Kong’s residential market has long been one of the least affordable in the world, bolstered by ultra-low borrowing costs and limited supply.

Even after 2019’s political unrest and Covid-19 lockdowns, developers could still command 10 per cent premiums on new buildings over nearby apartment blocks.

Real estate firms are now pricing apartments 10 per cent to 20 per cent lower than the peak of a couple of years ago, said senior associate director Roen Yeung at Centaline Property Agency’s research department.

With buyers remaining cautious, Centaline expects new home transactions in 2023 to drop to 11,000, the second-lowest in almost a decade.

Real estate firms have to compete not just with one another but existing homes as well.

Smaller companies have been the most affected, as they usually have less cash than larger peers and higher loan rates.

“Given that supply is high, developers are adopting a fast sales strategy,” said Mr Patrick Wong, a Bloomberg Intelligence analyst.

“When the funding cost is so high, there’s no benefit for them to hold the properties.

“It’s better for them to use the proceeds to pay back loans or get interest from deposits.”

In September, K&K Property Holdings, a private boutique Hong Kong developer, offered the first batch of apartments for its Sutton development at a 10 per cent loss, Commercial Radio Hong Kong reported at the time.

“Some small and medium-sized developers may have relatively high leverage, so they need to raise cash to pay back banks,” said UBS Group analyst Mark Leung.

“So there can be more room for discounts, which would affect market sentiment.”

When Road King Infrastructure and Shenzhen Investment started sales at their mass-market development in Tuen Mun area in September, the average price per sq ft was 11 per cent lower than another project in the area introduced six months before.

The two mid-sized Chinese developers’ net debt-equity ratio stood at 61 per cent and 48 per cent respectively, well above the risk ratio of Hong Kong’s larger firms; local giant Sun Hung Kai Properties’ ratio was 18 per cent in June.

Hong Kong’s real estate industry is waiting for Chief Executive John Lee’s annual policy address on Wednesday before deciding how to promote projects, according to Mr Wong.

The government could announce cuts for property stamp duties, Sing Tao Daily reported on Thursday.

The government recently hinted that it may ease property curbs introduced in the early 2010s.

Industry participants have been calling for the removal of certain property taxes, including a 30 per cent stamp duty on buyers who do not have permanent residency, and a 15 per cent levy on residents who already own a home.

Even if any policies are announced, Hong Kong developers still face challenging times.

“The new measures may boost sentiment, but I don’t think they will reverse the market,” said Centaline’s Mr Yeung.

“Developers will have to lower their prices if they want to increase their sales.” BLOOMBERG