Developers financing will spread to medium-sized flats

Just 6% of new residential supply will be medium-sized flats over the coming three years

March 28, 2019

HONG KONG – Developers are expected to spread their financing incentives to upgraders in order to boost the sales of bigger units. Moreover, developers will also build fewer medium-sized flats due to the weaker sell-through rates. The supply of medium-sized flats (753-1,075 sq ft, SA) is expected to drop to just 6% of total supply over the next three years, compared with 9% in 2018, according to JLL’s latest Residential Sales Report.

According to data from the Census and Statistics Department, the pool of higher income households (with income over HKD 60,000 per month) has increased from around 13% to 19% over the past five years. The income level of this cohort can ordinarily afford to purchase medium-sized flats, even in the current high price environment. However, the transaction volumes in this segment of the market remains limited, suggesting a high degree of pent-up demand.

The lack of transactions is partly attributed to the government’s implementation of various demand-suppression measures since 2010. Upgraders for example, are liable to an upfront Double Stamp Duty of 15% of the property price, despite those that sell their original flat within a 12-month period can get a stamp duty refund. It is a major barrier to buy property for upgraders.

Denis Ma, Head of Research at JLL, said: “The affordability issue stops many buyers from acquiring bigger units, resulting in weaker sell-through rates of medium-sized units. With the implementation of the vacancy tax getting closer, developers are more likely to offload unsold stock at a faster pace. Therefore, we anticipate more unsold medium-sized units to be put on the market shortly.”

Henry Mok, Senior Director of Capital Market at JLL, said: “To tackle the affordability issue, we expect developers, especially heavyweights with strong financial standing, to offer more financing incentives to boost the sales of bigger units by providing loans up to 90% of the property’s value. Borrower’s profiles of those plans will also spread from first-time home buyers to upgraders,”

“Looking further ahead, developers are likely to build fewer medium-sized flats to minimize the risks and financing costs if the government does not relax any spicy measures. We expect the proportion of medium-sized flats out of total supply will drop to an average of 6% in coming three years, compared to 9% in 2018,” he added. 

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