Residential property: sustainable recovery or dead cat bounce?

The public, in particular those burdened with negative equity on their residential properties, could at last utter a sigh of relief when the latest land auction results were announced on 29 August. With prices set for the two auctioned sites at the upper end of market expectations, it certainly looks like the mass residential market has finally found a floor under its feet.

The mass residential sector seems to have followed a 'last in, last out' rule and is now in the spotlight following these sectors: I/O, godown, Grade A office and luxury residential, which have, one after the other, all come out of the doldrums since the 1997 financial crisis.

"The bid prices for both the sites are much higher than what I expected. I think the auction result is a true signal that developers have regained their confidence in the mass residential market," commented Shih Wing Ching, managing director of Centaline Property Agency.

The Ma On Shan lot with a buildable floor area of 612,472 square feet (sq ft) was snapped up by Sino [83] for HK$865 million ($36.54 million) while the Tsuen Wan site went to a 50/50 joint venture of Sino and Kerry [683] for HK$292 million. The accommodation value (AV) of the two sites are respectively HK$1,412 and HK$1,297 per sq ft., as compared to Shih's estimate of around HK$1,000 to HK$1,100 for each.

"People are not being fair to Sino when they say that Sino is trying to prop up the market by bidding so aggressively at land auctions. Unlike other established developers like Cheung Kong [1], Sun Hung Kai [16] and Henderson [12], who have vast holdings of agricultural land which can be converted at any time into residential sites to create their land bank, Sino has to rely on government auctions and tenders to amass land in order to continue its business operations," he explained.

Recent clarification by Chief Executive Tung Chee Hwa of the government's housing policy, coupled with a better economic climate and most importantly, developers' first-hand knowledge of market sentiment from their own recent sales records, are all cited as reasons for the renewed interest in land bidding.

"The auction prices can be viewed as true indicators of the mass residential market's turnaround, as the sites are reasonably large in size and are located in typical mass residential areas," said Shih.

Nevertheless, he agreed that the supply situation remains a worrying factor and for this reason developers will be very restrained when considering any upward price adjustments. Moving their stock will reign supreme in the coming months, taking advantage of the present new-found market optimism.

Also, the recent buoyant mood is only confined to primary sales, with the secondary market still being relatively inactive. Average sales price in the primary market has been hovering in the HK$2,000 to HK$3,800 range, with prices varying depending on the quality and location of individual projects.

Major projects targeting the mass market that are likely to be launched within this year include:

Other sizable projects that may be marketed early next year are the Airport Railway Station properties including:

From the above, one can expect that in the next six months, at least 19,000 units will be coming onto the market. And the figure does not take into account several smaller projects, mostly located in the New Territories, each having a few hundred units.

In addition, another six huge projects in the Cheung Sha Wan/West Kowloon area providing a total of over 12,000 units will also be available for sale between 2001 and 2003. Three of those projects are a result of land use change from industrial/shipyards to residential while the other three are from earlier land tenders.

With the government intent on providing adequate supplies of residential lots for the private sector, developers' concern about the oversupply situation is understandable. Director of Lands, Bob Pope, has been adamant in sticking to the published land sale programme despite earlier requests from the Real Estate Developers' Association to transfer some large sites from that programme to the reserve list.

Under the land sale programme for the current financial year (April 2000 to March 2001), 15 out of the 18 residential lots are slated for the mass market, producing about 15,000 units for sale probably in 2002 or 2003. Other potential flat supplies would be MTRC's Tseung Kwan O Town Centre Station development comprising 914,000 sq ft of residential floor area (about 1,300 to 1,400 units), and other New Territories supplies resulting from agricultural land exchanges.

On the back of inventory build-up and land supply overhang against the still relatively weak purchasing power of potential buyers, developers' apparent brave front will be put through another gruelling test in the upcoming land tender in October of a 130,000 sq ft site at the Sai Wan Ho Ferry Concourse with a buildable floor area of over 1.3 million sq ft.

Most major development companies have had their shares well run up in the stock market's recent bull run. It remains to be seen whether these price rises are only a reflection of a technical rebound in the residential market, or whether it augurs the beginning of a new upward spiral in home prices.

Copyright StockHouse Media Corporation