According to JLL's latest Hong Kong Residential Market Monitor report, property developers are losing appetite for acquiring luxury residential sites and have shifted their focus to mass residential sites due to slow sales velocity, increasing financing costs and longer payback periods of luxury residential developments.
Developers have become more conservative in land bidding in late 2022, with various government sites sold below or close to the lower end of market expectations. In stark contrast to a residential site (RBL 1203) in Repulse Bay breaking the government land sale record a year ago at an A.V. of HKD 62,352 per sq ft, the recent tender of a residential site (RBL 1204) in Stanley was withdrawn after all bids failed to meet the reserve price.
Joseph Tsang, Chairman of JLL in Hong Kong commented, "Luxury residential sites have lost their shine. Developers are now gravitating towards acquiring mass residential sites rather than luxury residential sites under the current weakening sentiment in the luxury housing market. Unlike mass residential projects that take only two years to pre-sales, luxury developments are mostly launched upon completion around six years after land acquisition, on average. Cash inflow does not begin to occur until then. Since the sales performances were weak in the luxury housing market, the payback period would be even longer, and the developers need to afford a higher investment cost and risk."
Norry Lee, Senior Director of Projects Strategy and Consultancy Department at JLL also commented, "With interest rates having risen considerably in 2022 and likely to rise further, financing costs on development projects are substantially higher. Also, track records of recently completed luxury projects show that they had taken multiple years to reach reasonably high sales rates, which in turn lengthened the investment / payback period further.
For example, '21 Borrett Road (Phase 1)' offloaded 6 out of 115 units in 2022, compared to 28 units in 2021. Meanwhile, the new supply of luxury units has surged and may put pressure on the luxury home prices.
"The completion of Class E (saleable area of 160 sq m or above) units reached 513 units in the first 11 months of 2022, around three times higher than in 2021. Coupled with high financing costs, such projects' expected profit margins would be eroded," he added.