Luxury Market Sentiment Weakens

• The stock market correction and the first increase in the prime rate since 2018 have dampened luxury residential sentiment, with heaviest post-GFC quarter-on-quarter price falls registered in Q3/2022
• Luxury sites and en-bloc buildings are still in demand, and with two sites on Hong Kong Island to be tendered in Q4, we expect both to attract market attention when launched
• Luxury volumes remained thin in Q3 across all price brackets due to subdued sentiment; The mass market was equally hard hit
• Given the negative outlook, we expect the luxury residential market outlook to be clouded over the next 9 to 12 months, with values likely to correct by 10% over 2022, and to decline by a further 5% to 10% over 2023.

Luxury prices recorded heaviest fall as transaction volumes plummeted

The dismal performance of the IPO market, weak business sentiment both locally and in China, as well as continued strict quarantine controls and China’s firm ‘COVID zero’ policy, all contributed to a stock market correction in Q3. In addition, the US Fed has persisted in increasing rates to fight inflation at home and this has finally led to a prime rate increase of 0.125% by major local banks in Hong Kong, the first increase since 2018. Both have exerted negative pressure on the luxury residential market.

Luxury volumes (over HK$50 million) plummeted in Q3 with only 58 transactions registered, a marked 36% decline when compared to Q2, mainly due to subdued sentiment. The decline was across all price brackets except at the very top end (>$500 million) where volumes remained unchanged. Meanwhile, luxury prices across all districts recorded a quarter-on-quarter decline from 4.2% to 5.1%, the heaviest since the Global Financial Crisis.

Luxury homes and sites still in demand, despite slowing volumes

Some eye-catching deals over the quarter suggest that there is still demand for super luxury homes. Examples include House 3B (saleable area 4,299 sq ft) of Gough Hill Residences on the Peak sold for HK$500 million (HK$116,306 per sq ft saleable), or the detached house at 8 Kent Road in Kowloon Tong (6,460 sq ft saleable) sold for HK$538 million (HK$83,282 per sq ft saleable). The en-bloc at 68 Robinson Road was sold to Weave Living and LaSalle Investment Management for HK$275 million.

Appetite for luxury site remained keen. A luxury site on Hospital Road was sold for HK$551 million via Government tender to K. Wah, representing an accommodation value of around HK$12,820 per sq ft. Two more luxury sites were scheduled for tender from the Lands Department in Q4/2022, and with the ongoing developer interest in developable sites, we would expect the eventual launch of these two sites to attract market attention.

Perhaps the most atypical transaction of the quarter was that LC Vision Capital, a Singaporean fund, bought all the remaining 152 units (with 242 car parking spaces and 31 motorcycle parking spaces) at 21 Borrett Road, Mid-Levels for a total consideration of HK$20.766 billion, representing an average price of around HK$62,000 per sq ft. The move was a very rare foray by fund investors into the luxury residential sector, with the extremely low yield on offer (luxury yields at around 1.9% in Q3) not typically appealing to yield-driven investment funds. The move, however, may reflect the confidence of foreign funds in the local property sector, or the cautious outlook of some developers for the luxury market, at least in the short term.

Mass market declines with new launches at low prices attracting attention

The mass market was equally hard hit in Q3, as interest rate hikes have had a more profound impact on average homeowners. The primary sales market also suffered, as only launches in the New Territories with average prices under HK$15,000 per sq ft saleable sold well, with most launches in urban areas for HK$20,000 per sq ft saleable and above struggling to find buyers. Mass prices declined by 3.7% in Q3 as a result.

Luxury prices expect further drop in 2023

Against the background of rate hikes, slow recovery of both the local and China economies, the COVID-zero policy in China and persistent inflationary threats, we expect luxury prices to decline by 10% for the full year 2022 and adjust downwards by another 5% to 10% in 2023, although the possibility of the government unpicking previous cooling measures, for example the successive stamp duty schemes, could potentially subject the price trend to a different picture of development.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Despite a drifting luxury market and extremely low volumes, luxury sites are still in demand. While interest rates look set to continue to rise over the next three to six months, rising inflation and the possibility of recession remain key concerns among Hong Kong’s ultra-high net worths, many of whom plan to realign their global investment portfolios to mitigate such risks."

Ms. Cherrie Lai, Senior Director & Head of Residential Sales, Development & Investment, Prestige Home, Savills said: "With interest rates looking set to rise through the remainder of this year and early next, real interest rates could turn positive as early as the middle of 2023, prompting cash rich investors to be more cautious when making large capital investment decisions such as buying luxury properties."