In the game of chess, zugzwang is a situation where any possible move in the game could worsen a player’s position. With private home sales in Hong Kong falling to 2,045 units in January, the lowest monthly level on record and about a third of the volume recorded a year ago, an increasing number of developers, opportunistic investors and buyers—three main players in the game—are finding themselves in zugzwang.

Developers are generally unwilling to lower prices, for fear of accelerating the city’s long-awaited price drop; individual investors are trapped in a highly illiquid secondary sales market amid the government’s demand suppression measures; and buyers are holding back on purchases as they await more affordable opportunities.

Surely though, like in a chess game, there are tactics to shift focus away from the zugzwang.

Whilst unsold inventory in the last quarter of 2015 was still 3,000 units off the long-term quarterly average level of 9,000, the projected completion of more than 60,000 flats over the next three years is looking to pile onto the balance sheet of developers amid a slow sales market. Developers with relatively healthy cash positions are likely to put more properties that were originally built-for-sale onto the leasing market to cover ongoing holding costs whilst reassessing their sales tactics. It is not uncommon for Hong Kong developers to hold and lease properties only to repackage them for sale in the primary market at a later date; in some instances, after more than 10 years. This strategy, however, will likely be focused on properties positioned in the mid-range of the market (priced between HKD 20 and 50 million) given that transaction volumes at this price point have been relatively more affected by the stringent LTV measures placed on buyers.

In the secondary market, opportunistic investors wanting to cash out, but unwilling to lower their asking prices may shift their strategy and continue to lease out their properties due to the lack of buying interest in the market. The surge in competition from built-for-sale stock, however, could reduce their bargaining power in the leasing market and induce them to grant more concessions. In order to maintain a competitive edge, investors would increasingly need to address aesthetic, practical as well as tenancy management considerations. This might be in the form of a look-and-feel quick-fix of their units and furniture provision incentives, high-profile marketing or value-added service offerings.

But is there enough demand in the rental market?

Given the uncertainties in the sales market outlook, would-be-homebuyers may opt to defer their purchase plans and turn to the leasing market instead. The overall rental demand outlook though remains affected by downgrading trends in the market, owing to shrinking expatriate housing budgets and the ongoing shift from corporate to personal leases.

Looking ahead, Hong Kong’s economy is only expected to grow by 1-2% in 2016 per the government’s latest forecasts, a slowdown from the 2.4% recorded in 2015. An increasingly competitive rental landscape, dim hiring intentions and structural changes in demand should leave rents under pressure over the next few years.

Like in any game, there will be winners and losers though the key lies in being able to maximise available chances amid the challenges and be prepared for the next property upcycle.

Hong Kong private residential market indicators
Source: Transport and Housing Bureau, Land Registry, Rating and Valuation Department, JLL

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