Hong Kong Luxury Home Rents Reach ‘Tipping Point’ as Banks Halt Expansion

By Kelvin Wong - Dec 19, 2011 3:28 PM GMT+0700

Hong Kong luxury home rents, which fell last quarter for the first time since mid-2009, may slump 10 percent next year as banks and hedge funds scale back amid the threat of a global recession, according to brokers including Jones Lang LaSalle Inc. (JLL) and Colliers International.

“We’re definitely at that tipping point,” said Anne-Marie Sage, Hong Kong-based head of residential leasing at Jones Lang, the world’s second-largest commercial brokerage. “We’ve began to see vacancies at the very top end of the market. The banking and the financial sector have basically stopped all movement.”

HSBC Holdings Plc (5) and Macquarie Group Ltd. are among banks shedding jobs in the city as investment and corporate finance activity slows. Rents of luxury homes -- those with at least 100 square meters (1,076 square feet) -- decreased 1.6 percent in the third quarter, after gaining almost 19 percent in 2010 and 5 percent in the first half, according to Jones Lang.

HSBC, Hong Kong’s biggest bank by deposits, will cut 3,000 jobs over the next three years in the city, as part of its plan to reduce costs globally, the bank said in September. Macquarie closed part of its global equity derivatives operations in the city, people with knowledge of the matter said last month.

“I don’t have any statistic yet, but I would suggest the number of rental transactions has decreased over the past couple months,” said Sage, who expects luxury home rents to fall 5 percent to 10 percent next year.

Job Cuts Ahead

About 75 percent of human resources managers in the Hong Kong financial services industry are concerned that global economic uncertainty will affect the Asia-Pacific region, according to a survey by recruitment agency Morgan McKinley. Twelve percent of those surveyed said they expect to be “handling redundancies over the next 12 months,” it said.

The MSCI Asia-Pacific Index (MXAPJ) has fallen 18 percent this year and is heading for its first annual loss since 2008 as the European debt crisis and weaker global economies damp investor confidence.

The Hang Seng Property Index, which tracks Hong Kong’s seven-biggest developers, fell 1.5 percent at the close of trading in the city, extending its loss this year to 26 percent. The benchmark Hang Seng Index declined 22 percent in 2011.

Average monthly rents of existing homes in the city fell 1 percent in October from the previous month to HK$20.50 per square foot, Centaline Property Agency Ltd. said in a Dec. 7 report. That was the first decline since March 2009, Hong Kong’s biggest closely held realtor said.

“We’re seeing more supply of flats for rent in the market,” said Wong Leung-sing, an associate director of research at Centaline. “Prices and sales are falling so many people who wanted to offload their units previously have switched to leasing them out.”

Rush for Deals

A 2,800 square-foot apartment at the Repulse Bay complex in the Island South district was leased for HK$130,000 ($17,000) a month in October, according to statistics compiled by Centaline. A similar-sized unit at the Fortuna Court building in the same district went for HK$108,000 a month, the realtor said. A 2,600 square-foot apartment in Brewin Court in Mid-levels was rented out for HK$103,000 in October, it said.

Landlords looking to rent out properties with monthly rents of more than HK$100,000 have since last quarter raised the commission they pay to leasing agents to as much as one-and-a- half-months rent from the normal half-month rent, according to Ricky Poon, Hong Kong-based executive director of residential sales at Colliers.

“This shows they are sensing that the market is really turning,” said Poon, who forecast luxury rents to fall as much as 8 percent next year. “They realize if they don’t seal the deals now, conditions will probably worsen in the future.”

Finance Hub

Recruitment advertising in Hong Kong fell 2 percent in the third quarter from the previous three months, while “candidate confidence levels are muted with many unwilling to leave current positions to enter an uncertain market,” Robert Walters Plc, a U.K.-based recruiting agency, said in a Dec. 7 statement.

Hong Kong topped the World Economic Forum’s 2011 index of financial market development, overtaking the U.S. and U.K. for the first time. Finance, real estate and professional sectors account for 27 percent in the city’s gross domestic product in 2010, according to government’s data.

The number of registered financial professionals in the city rose to a record 40,039 in the third quarter, according to the Securities and Futures Commission.

‘In Sync’

Home prices in Hong Kong have fell to a near six-month low after climbing about 70 percent since the beginning of 2009, according to an index compiled by Centaline. It’s more expensive to buy a home in the city than in London, Moscow or New York, Savills Plc said in a report in January that compared London with the other cities.

“Home rents and property prices move in sync,” said Lee Wee Liat, Hong Kong-based analyst at Samsung Securities Ltd. “We’re seeing some retrenchment in the financial sector. That’s going to affect people who’re negotiating their rentals.”

Rents in areas traditionally favored by expatriates, such as the Mid-levels, about a 10-minute drive from the Central business district, and the exclusive Island South, will probably fall less than those in “newer areas” such as West Kowloon, said Poon of Seattle-based Colliers.

“In the new luxury areas, most landlords are small owners and they tend to cut prices more aggressively just to ensure a deal’s done,” Poon said. “Whereas in the traditional areas, the landlords are mostly the developers who’re not as desperate for cash flow.”

Retail Executives

Still, more than 70 percent of Hong Kong companies expect to raise wages next year, compared with 63 percent in 2011, with 38 percent forecasting increases in salaries of as much as 5 percent, the Hong Kong General Chamber of Commerce said Dec. 13.

The luxury rental market may be supported by the expansion of international retail chains in the Asia-Pacific region, with many stationing senior executives in Hong Kong, where their regional headquarters are, said Steven Hui, manager of real estate and tenancy management at Hong Kong-based Crown Relocations.

“The financial sector is definitely slowing down but the market is still OK,” said Hui. “Some of these companies are offering pretty competitive housing allowances of HK$100,000 to HK$150,000 a month for senior executives. So I don’t see things turning to be as bad as some people think.”

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net