Urban Land Use: Hong Kong Residential on the Rise
A summary of the key sites to be released in the government's land sales programme for 2018/2019 alongside the new tender process.
Hong Kong faces the same land use challenges as cities worldwide: how to achieve the right balance to maximize the economic benefit and quality of life of residents.
Private residential housing is scarce in Hong Kong—official figures put it as occupying just 2.3% of Hong Kong’s urban and built up land in 2016—but supply looks set to increase.
"The fact that 27 of the 32 sites to be tendered by the government in the 2018/2019 financial year are residential is an indication that the government is determined to address the continued demand for housing, and understands its economic importance," says Dorothy Chow, a Regional Director with our Valuation Advisory Services team.
Those 27 residential sites could yield around 15,200 flats. Add in supply from the MTR Corporation, Urban Renewal Authority and private developments, and the stock in the pipeline builds to 25,500 flats. But even with larger than usual supply, high prices are still on the cards.
In formulating their bids, developers closely watch Hong Kong's red hot housing prices, end-user demand, and benchmark against previous winning land sale bids—which have repeatedly broken record highs in recent years.
"For 2018, we expect housing prices to continue to rise by 10%, with the luxury segment outperforming mass residential properties," says Ingrid Cheh, an Associate Director with our Hong Kong Research team. Luxury residential sites in Kai Tak, the site of Hong Kong's former airport, and at Mansfield Road on The Peak could cost record prices.
In betting on the rise and rise of Hong Kong's residential market—and tendering bids to match—developers have been building higher sale prices into a market where the average price of housing is already the highest in the world at 17 times the medium household income.
That has had a big impact on the city's residents: 90% of residential transactions by volume come from end users.
"There is a lot of pent up demand in the market, generated by marriages and new households formed," notes Cheh. "Demand is also coming from investors, and we see homeowners re-mortgaging existing property and buying second homes for their children or family members, despite the stamp duty measures imposed on investment activity."
"Developers are completing many more new projects, with over 20,000 units expected to come on the market in 2018. That's higher than the government's annual private housing target of 18,000 units, and 42% more than the annual average of 14,000 units over the past five years," says Chow.
"90% of these units will be mass market, with around 4% luxury," adds Cheh, noting that developer incentives make it easier for homebuyers to arrange affordable financing in the primary market, compared with those sold in the secondary market. "Limited public and private rental options are also driving private market demand, especially for so-called 'nano-flats' with a lower entry price point."
Bids for land sales are expected to come in from Hong Kong developers, their mainland counterparts, and joint ventures (JVs).
"Local developers are likely to still bid aggressively with the expectation that prices will continue to rise, although with the increased competition they may not consistently win," says Chow.
Mainland developers have won approximately 70% of land sales in 2017, in terms of number of tenders. While capital controls are expected to soften investment activity a bit, many Mainland developers still have a mandate to plant a flag in Hong Kong. JVs between local and Mainland developers are also increasingly players in the programme, putting in relatively higher bids because they can share the investment risk across their multiple entities.
Developers will soon be better informed of bidding strategies in the tender process—Hong Kong's government says it will reveal all bids to address concerns about overpriced offers.
"This is a big step for the government and one to be welcomed," says Chow.