Hong Kong developers under pressure to cut prices amid slowdown

[HONG KONG] Hong Kong's developers, who are throwing in enticements from iPhones to wine coupons in response to the slowest home sales in 25 years, might be running out of gimmicks to stoke demand.

Most buyers aren't biting as property analysts predict prices will fall as much as 25 per cent this year after declining 11 per cent since September. At upscale The Avenue project in Hong Kong's Wanchai district, developer Sino Land Co and the Urban Renewal Authority have sold only one of 36 remaining apartments this year despite inducements including a HK$1.5 million (S$270,702) voucher to buy new furniture.

The next step may be the outright price cuts that developers have long resisted because of fears that they'll fuel expectations of steeper declines.

"Obviously buyers, whether as end users or investors, are taking their time and aware that prices might go down further," Antonio Wu, deputy managing director at Colliers International Hong Kong, said in a phone interview. "There will be a lot more discounts than today. If they really want to sell, they really have to cut the price and start sales."

Developers including Henderson Land Development Co, Sino Land and Kowloon Development Co have been offering customers a raft of discounts, reducing costs to buyers by as much as 20 per cent through stamp duty rebates and other promotions, without having to overtly slash prices. That strategy is looking increasingly unsustainable as weak demand for housing coincides with a surge in supply of new homes.

Hong Kong new home sales plunged 70 per cent from a year earlier to 450 units in January, and data from Bloomberg Intelligence suggests there will be twice as many new homes coming on stream this year than were sold in all of 2015.

"The Kong Kong market is going to be under immense pressure this year," said Paul Hart, executive director for Greater China at Knight Frank LLP. While developers are not heavily indebted, Hart said they will "need to demonstrate to shareholders that they have recurring revenue coming through so this current situation of incentives and aggressive pricing will continue."

How the market responds to the latest promotions, many of them tied to the Year of the Monkey which began on Feb. 6, will set the tone for pricing for the rest of the year, said Yu Kam- Hung, senior managing director at CBRE Group Inc. in Hong Kong.

"Every Chinese new year, developers have to devise a strategy of how to push residential units," he said in a telephone interview. "These next two to three weeks will be very important."

Henderson Land is leading the charge. On Jan 28, the company dressed five of its sales staff in identical bright pink suits and matching ties to unveil its "Lunar New Year Red Packet Money" promotion. Purchasers can get traditional "lai see" envelopes containing checks ranging from HK$38,800 for flats costing around HK$3 million, to as much as HK$388,800 on its largest properties.

Since they were first offered, Henderson Land has sold just 18 flats scattered across four different developments on Hong Kong Island, Kowloon and the New Territories, while a fifth, Parker33 in Shau Kei Wan on Hong Kong Island, has sold none.

Across the harbour, Kowloon Developmenthas met with muted success with an offer of an iPhone 6s to every purchaser of a unit at its Upper East development. So far just one handset has been awarded since the promotion started on Feb 1.

Cheung Kong Property Holdings Ltd is also offering lunar new year rebates worth as much as HK$108,000 to people who buy flats in its Yuccie Square project in the Yuen Long district in the New Territories from Feb.4 to Feb. 21. It's also throwing in wine vouchers for HK$3,000.

But as anemic sales at The Avenue show, the giveaways just aren't working. So far the developers have only managed to make one sale on a 911-square-foot (85-square-meter) apartment on the 37th floor. After subsidies and discounts worth 15.5 percent, and a HK$1.5 million furniture allowance, the final price was HK$24,696,300.

The competition to find buyers will only intensify as more flats come on stream. Bloomberg Intelligence estimates that as many as 30,000 new units will be available for sale this year, which will make things challenging for developers who already saw a slowdown last year, when primary volume fell 0.2 percent to 16,826 units. Another factor weighing on prices was the government on Jan. 13 raising its five-year target for new housing supply to 97,100 new homes, up from a previous estimate of 77,100 units.

Hong Kong's home prices surged almost 370 percent from their 2003 trough to their peak in September. As the city became the world's most expensive place to own a home, regulators introduced measures to cool the property market in 2013. The curbs included tighter mortgage requirements at banks and higher stamp duties, as well as a special tax on non-resident buyers.

As developers are starting to feel the pinch, some are calling for the curbs to be lifted. In an interview with the Hong Kong Standard this week, Henry Cheng, the chairman of New World Development Ltd, urged the government to relax the cooling measures. Mr Cheng, who said in the interview that construction costs remain high, expects prices to fall at most by 10 percent this year.

The government has no plans to ease the measures, Radio Television Hong Kong reported on Feb 18, citing Hong Kong's Secretary for Transport and Housing, Anthony Cheung.

BLOOMBERG