Hong Kong’s luxury residential property rents continued to fall in 2013’s first quarter as demand cooled amid measures designed to curb market overheating, Jones Lang LaSalle says in its latest leasing market report. The real estate specialist said it is seeing demand for such properties shifting to Kowloon and the New Territories.

Rents for luxury properties fell by 1.2 per cent in the quarter from the previous quarter after an overall drop of 10.9 per cent year-on-year in 2012. On Hong Kong Island, rents for luxury properties declined by 1.4 per cent, quarter on quarter, with the Mid-levels and Island South recording the largest drops for the time period (1.5 per cent). Serviced apartment rents recorded a slight decrease of 0.3 per cent in the quarter.

“Softer demand for high-end luxury properties continued to weigh down rents in 1Q13, although demand and rents for mid-luxury premises held firm,” the firm said.

Expatriate demand

With cuts in expatriate housing allowances owing to the sluggish European and US economies and corporate restructuring, corporate executives turned to mid-luxury rental premises, the report said.

As a result, demand for luxury properties with monthly rents from HK$50,000 to HK$100,000 (approximately $6,400 – $12,800) has risen, accounting for 37 per cent of the total leasing transactions conducted by Jones Lang LaSalle last year, up 6 percentage points from 2010.

According to JLL’s research data, leasing demand from the financial services sector softened, partly due to a 25 per cent drop in the number of families from the financial sector moving to Hong Kong in 2012. On the other hand, stronger demand was recorded from the legal services sector and particularly the retail sector, which saw a large influx of staff and their families into Hong Kong last year. 

Property cooling measures

The leasing market was boosted by the government’s latest cooling measures in the property sector. The cost of purchasing luxury properties by expatriates rose sharply. For example, the initial cash requirement for a property with a value of HK$12 million ($1.5 million) has almost doubled. Consequently, leasing demand has risen as more expatriates turn to the leasing market, the report said. 

On the supply side, new luxury property units will remain limited, with the supply of Class E luxury units (1,722 sq. ft. and above) likely to be around only 300 units for 2013 and 200 units in 2014, the report said.  Moreover, a majority of the upcoming supply will be clustered in outlying areas or non-traditional locations outside Hong Kong Island. The supply pipeline from 2013 to 2016 will be mainly focused on the New Territories and, in 2016 - about a half of all new units are expected to be concentrated in the this area.

Geographic flight

“The geographic flight to non-traditional locations for luxury properties is related to the close link between the residential leasing market and the office market. Weak demand in the office sector has already been reflected in the decline of luxury residential rents,” said the report.

Moreover, the demand for luxury residential property leasing will likely move eastward following the trend of the office market. With the roll-out of the government’s Kowloon East Development plan, the emergence of new office markets in Kowloon will support greater accommodation demand for residential properties. New transport infrastructure such as the Wanchai Bypass and Island Eastern Corridor Link in 2017 and new MTR rail lines connecting Central to Kowloon East by 2020 will also drive demand in Kowloon East, the report said.

In addition, although new international school places will remain tight in the next few years, the proposed construction of international schools in Sai Kung, Kowloon Bay and Lam Tin will further expand the customer base for luxury properties in Kowloon and the New Territories.

“As Hong Kong’s economy is expected to improve with GDP growing close to 4 per cent in 2013 and the employment market remaining positive, we expect luxury residential rents to bottom out this year, and we remain cautiously optimistic about the outlook of Hong Kong’s residential leasing market in 2013,” Denis Ma, local director of Greater Pearl River Delta Research for Jones Lang LaSalle Hong Kong, said.