Is Hong Kong’s luxury residential market set for a historic rout in the months ahead?

Last week, a 5,630 sq ft duplex unit on the 50th and 51st floor of Arezzo development at 33 Seymour Road in Mid-Levels was leased for a monthly rent of HK$100,000, according to the city’s Land Registry. The HK$17.80 per square foot price tag is half the average rate on small and medium-sized homes in the city tracked by Midland Realty.

The eye-catching transaction in the property owned by Taiwanese actress Wu Pei-chi, suggests the rates have crashed. Others dismissed it as an anomaly, or a “mate’s rates” deal.

One thing is for sure, the city’s recession-hit economy is about to be roiled by another round of political turmoil, casting a pall on the industry. Over the past 12 to 18 months, trade war, social unrest, and the coronavirus pandemic have combined to erode high-end rents by 15 per cent in the city, according to Habitat Property.

Now, the national security law is raising serious questions about its status as a hub for multinationals and banks, which traditionally provide the city’s landlords with a rich pool of renters among their expatriates and other high-earning executives.

“The downward trend will continue for a while because at the moment, we do not see many positive supporting factors in the leasing market,” said Koh Keng-shing, founder and chief executive of Landscope Christie's International Real Estate.

Like other parts of the property market, Hong Kong has become a tenants’ market. Even the budgets for high-end renters are being squeezed as companies trimmed costs during the economic slump. Owners appear to be prepared to cut rents, rather than selling their assets at a loss, according to JLL.

Koh of Landscope has seen people downgrading from monthly rents of HK$200,000 and HK$300,000 to the HK$100,000-HK$150,000 bracket, or even to the sub-HK$100,000 levels.

The slower demand for leasing in luxury residential properties is likely to also pressure capital values, he added, Many of these properties are held as long term investments and the decline of rents is eroding the expected return.

The capital values of luxury residential properties fell by 8.6 per cent from the highest in the second quarter of 2019, according to JLL’s Residential Market Monitor Report published last month. Koh said the decline has reached 15 per cent based on his observation over the past 12 months.

Arezzo is a 48-storey development by Swire Properties in 2014. There are three flats on each floor, and served by three passenger lifts and one service lift per floor. The transaction in mid-June raised eyebrows because the rate was a deep discount to the going rates of HK$55 to HK$82 per square foot, based on online listings at squarefoot.com.hk.

“This is obviously not a market-based rental as it was leased to a friend on ‘mate's rates’ so it's not reflective of the market,” said Victoria Allan, founder and managing director of Habitat Property, pointing to other better indicators. “It will have no impact on the neighbourhood.”

For example, a 2,777 sq ft flat at 3 Headland Road in Repulse Bay was rented out at HK$190,000 per month in April, or HK$68.40 per sq ft, according to property agents who declined to be named because the information is private. The rate was 36 per cent lower than the previous lease, according to agents.

For another, a 2,742 sq ft house at 66 Deep Water Bay was recently leased out at a monthly rate of HK$200,000, or HK$72.90 per square foot, reflection a 29 per cent slide from the previous lease.

Prices for such high-end residential homes could drop by another five to 10 per cent in the near future, Allan said.