Border Reopening to Boost Sentiment in Luxury Residential Market

• The stock market rebound and an easing of COVID restrictions in Hong Kong improved the luxury market sentiment at Q4/2022, while the escalating borrowing costs remain a key concern
• Eye-catching deals such as the sale of the luxury site at 5 Mount Cameron Road for HK$1 billion reflected a revival of sentiment towards year-end
• The proportion of Mainland buyers in the luxury market hit a new low in 2022 as prolonged border closure, muted business prospects and changing policies all affected Mainland UHNWIs’ appetite for trophy assets in Hong Kong
• Luxury volumes continued to shrink in Q4 across most price brackets, with the few high-profile deals supporting volumes in the HK$200m+ bracket
• Border reopening should improve investment sentiment in general, while the potential influx of Mainland professionals and middle management may boost buyer profiles for luxury apartments in emerging areas such as West Kowloon and Tseung Kwan O.

Luxury apartment and townhouse prices down by 11-12% in full year 2022

The stock market rebounded strongly during the last two months of 2022, vastly improving investment sentiment in general.  Nevertheless, the rate hikes by the US Federal Reserve in December, lifting the Fed Funds Rate to 4.25% to 4.5%, continued to cloud the prospects for the local luxury residential sector.

With the two opposing market forces in place, luxury residential prices continued to fall, albeit at a slower pace, in Q4/2022, bringing the full year decline in townhouse prices to -12.1% and luxury apartment prices on Hong Kong Island, Kowloon and the New Territories to -11.8%, -11.2% and -11.6% respectively, the largest year-on-year price drop since the Global Financial Crisis in 2008/09.

Market saw significant sales in Q4 as developers appeared cautious

Some eye-catching deals done over the quarter reflected a revival of sentiment towards the end of last year. The most significant transaction was the sale of the site at 5 Mount Cameron Road on the Peak for HK$1 billion, representing an AV of 94,438 per square feet and a rare purchase by a Mainland related party in the super luxury sector in 2022.

On the other hand, the much-anticipated tender of Cape Road luxury residential site was cancelled on 10 January 2023, as the tendered premiums of the tenderers did not meet the Government’s reserve price for the site. This sent out a mixed signal to the market as developers now seem less than optimistic in bidding for large-scale residential sites in traditional luxury enclaves.

Luxury volumes down in face of fewer Mainland buyers in the market

The proportion of Mainland buyers of luxury properties valued above HK$100 million on the Peak, Mid-Levels and Southside reached a new low in 2022 at 29%, the lowest level since 2016. The total number of deals (34, ten of which were Mainland) also declined substantially from previous years, as prolonged border closure, receding business prospects in China and changing policies all affected Mainland UHNWIs’ appetite for trophy assets in Hong Kong.

Luxury volumes shrank further in Q4 across most price brackets to record 59 deals, a further 20% drop compared to Q3. The few high-profile deals, however, supported volumes in the HK$200m+ bracket with a 40% rebound quarter-on-quarter.

Boost by border reopening aside, the scale of Mainland capital influx remains critical

Border reopening should improve investment sentiment in general, while the potential influx of Mainland professionals and middle management may boost buyer profiles of luxury apartments in emerging areas such as West Kowloon and Tseung Kwan O, while Mainland UHNWIs may once again focus their interest on super luxury homes.

Based on the assumption that the negative impact of higher mortgage rates and Hong Kong/China economic uncertainties on the luxury sector are likely to outweigh the benefits of border reopening during most of 2023, we anticipate townhouse prices to drop by another 5% to 10% in 2023 before more Mainland HNW capital – corporate and public debt levels in the Mainland business environment allow – returns to the local market for luxury homes towards the end of 2023, while luxury apartments may perform slightly better posting a 5% decline as more Mainland professionals aim to settle in Hong Kong and buy new homes.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Luxury volumes have continued to shrink but the reopening of the border should bring back Mainland professionals with an appetite for luxury apartments in emerging areas."

Ms. Cherrie Lai, Senior Director & Head of Residential Sales, Development & Investment, Prestige Home, Savills said: "While interest rate hikes may end early this year, the cost of capital looks set to remain high (HIBOR>5%) for most of 2023 while uncertainties remain for the speed of recovery of both the Hong Kong and China economies."