SINGAPORE, Oct. 22 (UPI) -- The Hong Kong's property market, which has long been in the doldrums, is expected to turn around next year on the back of the nascent economic recovery and easing of the manufacturing supply overhang.
From 1987-1997, the Hong Kong property market experienced its golden years with buyers attracted by attractive premiums of rental yields over real interest rates. However, since the 1997 Asian financial crisis, housing prices have tumbled nearly 70 percent.
Only in the last 3 months have housing prices showed signs of recovery, with some small price increases for the first time in 6 years. Foreign investors maybe already smelling the recovery wind as some funds have been reported showing interest in buying large-scale Hong Kong properties.
Ever since the end of the SARS outbreak, the local economy has been on a rebound, and some economists believed that the famous city could post a growth as high as 7 percent next year.
"Based on conservative assumptions, we forecast 7 percent real GDP growth for 2004, and a double-digit growth will not surprise us," says Eddie Wong, Chief Asian Strategist at ABN AMRO. "Our 2004 real GDP growth forecast is mainly driven by strong growth in exports of services, partly due to this year's low base," he adds.
Wong also bases his optimism on the current U.S. dollar weakness, as history has shown that the Hong Kong stock market usually outperforms the region in a weak dollar environment with a one-year time lag.
Not all economists are as optimistic as Wong, but they are all hopeful the recently signed CEPA economic agreement with China will bring renewed cooperation between Hong Kong and the huge neighboring Guangdong province and open up the border, helping re-shape Hong Kong's role in China's development.
One of the immediate and direct impacts of the CEPA arrangements is on the tourism trade. Individuals in seven cities in Guangdong province, Beijing and Shanghai are now allowed to visit Hong Kong, while the rest of Guangdong province will be gradually included by early 2004. The new rule is expected to bring 5 million mainland visitors, which will be spending their money in local shopping centers.
In a recent report, ING Barings projected that the share of mainland tourist spending in retail sales would increase from 7.8 percent in 1998 to almost 30 percent in 2004. Economists believed this influx of new spenders will give a shot in the arm to the economy and will help the retailing property sector, as most retailers are likely to target store expansion to cater to this new demand. AS a result, ING revised up its 2004 headline retail rental growth forecast to 30 percent year on year from 0 percent.
The optimism extends to the residential property market. Prices there have fallen down 68 percent from the 1997 peak, but have since rebounded 5-6 percent this year. ING is forecasting residential prices to rise 10 percent in 2004 and 15 percent in 2005, as property prices have become very affordable, interest rates are stable and the improving economic outlook should help lift unemployment insecurity, thus boosting consumer confidence.
Brokerage CLSA is as optimistic as ING Barings, forecasting property prices to rise 10 percent in 2004 and another 10 percent in 2005. CLSA argues supply and demand in housing could reach equilibrium by the second half next year.
Buyer affordability was now at a record level due to the falls in property prices and lower mortgage interest rates. According to CLSA, it now costs only 29 percent of household income to service a mortgage, compared with more than 100 per cent in the first quarter of 1997.
Meanwhile, rental returns are much higher than deposit rates, so with the expectation of property prices rebounding, the demand for long-term investment will reappear, economists predict.
Amid this optimism, Standard & Poor's recently cautioned that although the property market may be near the bottom of a 6-year downcycle, a significant increase in the price of housing over the next term was unlikely.
Credit analyst John Bailey noted that despite signs of an improvement in investor confidence, developers had yet to regain their pricing power.
Given that an abundance of new residential properties for sale is likely over the near term, Bailey believes that any upside potential in the price of residential properties will be limited.
