Residential Market Sees Mixed Signals Amidst Primary Launches and Luxury Volatility

• Primary launches dominate residential market, with discount-driven sales increasing by 27% QoQ.
• Residential site in urban locations with affluent buyers’ profile may still favoured by developers.
• Luxury sector experiences a 24% QoQ decline in transaction volume due to lack of affluent Mainland buyers and high interest rates.
• Super luxury market remains quiet, yet unique properties continue to attract interest.

Price discounts drive growth in primary sales
Developers have been able to achieve satisfactory primary launch results through aggressive sales campaigns and price discounts, in particular for small units, being 15% to 20% lower than those launched in earlier phases in 2022. These launches, which have registered 3,569 transactions in Q2, a significant 27% increase in transactions quarter-on-quarter, are expected to dominate the residential market. Despite the 15.5% overall residential price reduction in 2022, these price discounts have stimulated the market, leading to a 2% reduction in current home prices in Q2 following a 7% rebound in Q1.

Assuming similar level of primary sales rate in the second half of 2023, primary sales would probably be 20% higher than last year’s 10,318 transactions, but still 15% lower than the COVID-period average of 14,427 transactions per annum.

Residential sites in urban locations were still favoured by developers
A developer recently purchased a serviced apartment in Tin Hau, zoned for residential use, for HK$468 million, and a residential site in Quarry Bay for HK$412 million, with both acquisitions aimed at developing residential properties. The properties were valued at approximately HK$10,000 per square feet each, and the purchases indicate that developers still favour urban locations with affluent buyers in the current uncertain market.

However, the same cannot be said for the most recent land auction in Kennedy Town, where a 24,326 - square foot residential site located on the corner of Sai Ning Street sold for HK$1.72 billion, or an average value of HK$7,070 per square foot. This sale represents a 20-year low for residential auctions on Hong Kong Island. Although the site has a longer-than-normal development cycle and some unfavourable nearby facilities, a nearby site was sold last year for an average value of HK$9,500 per square foot, which reflects developers' cautious attitude towards short-term home prices.

Luxury residential sector sees decline in transaction volume, but unique properties continue to attract interest
The luxury residential sector has seen a decline in transaction volume, down 24% quarter-on-quarter from 165 deals to 126 deals. This drop is primarily due to sustained high interest rates, stock market turbulence, and a general lack of affluent Mainland buyers. Nevertheless, volume was still 16% higher than a year ago, reflecting continuous positive impact of border reopening.  While there were 61,000 potential talent influx from various schemes over the first six months of 2023, most of them were Mainland Chinese, would opt for leasing rather than buying their homes in the first few years before truly settling into Hong Kong, as well as the refunds of BSD and DSD would only be made at the time they obtain Hong Kong permanent residency, i.e. in seven years’ time.  As such, luxury apartment prices remained flat in Q2.

While the super luxury market remains quiet, unique properties continue to attract interest. For example, the sale of Villa Ellenbud on Sassoon Road in Pokfulam for HK$550 million indicates the continued interest of super-rich buyers in niche products.

Developers and interest rates to impact market in 2H
The short-term prospects of the mass residential market rest with both interest rate movements as well as developers' stances in primary launches. With interest rates set to increase further this year, developers may offer additional discounts to their primary projects given the current sluggish sentiment. As a result, prices may fluctuate within 10% to 15% in the second half of 2023, with primary sales likely to dominate the mass market over the period.

As for the luxury sector, volume is expected to remain low, with prices becoming volatile. Distressed sales may again dominate the market. Nevertheless, unique houses may fetch headlines with high prices if the right buyers could be found.

Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Primary launches to dominate the mass residential market while luxury residential prices may become more volatile in the second half of 2023.”

Ms. Cherrie Lai, Senior Director, Head of Residential Sales, Development & Investment, Prestige Home, Savills said, “Luxury volume slowed amidst lack of Chinese buyers and escalating cost of funds, but niche products in the super luxury market still attract interests.”