Lantau property looks to have a long, healthy ascent but Discovery Bay will remain the queen of island real estate for the foreseeable future. Elizabeth Kerr reports.
Very little has changed in Lantau over the past year, at least where property is concerned, but that doesn’t necessarily mean there’s no news. Two landmark sales have driven valuations up, corporate contraction is being felt, and Tung Chung is more aggressively poised for a future as the first stop on the road to the SAR.
Above it all is Discovery Bay, holding on to its position as Lantau’s premium property sub-market.
The shape of things
As a market, Lantau has proven to be a peculiar beast all its own. Like Hong Kong Island, it has luxury (Discovery Bay), urban (Tung Chung) and lifestyle (South Lantau, Mui Wo) sub-districts, which have historically come at a fraction of the price of counterparts in Repulse, Causeway or Clear Water bays. Connectivity issues, poor dining options and limited retail choices previously had a lot to do with that discrepancy, but that hasn’t been the case in many years. The DB Plaza renovation and massive infrastructure expansion at Tung Chung are likely to cement Lantau as a viable purchase option in the coming years, for end-users and investors alike.
According to the Rating and Valuation Department, average flat prices on Hong Kong Island (750 to 1,000 square feet) averaged just over HK$19,000 per square foot in February. In the New Territories it was approximately HK$12,000.
“Rent of course is far lower than rent on Hong Kong Island,” begins Savills’ head of residential services, Edina Wong. “Discovery Bay’s rent is, however, on par with parts of Kowloon. It has become very popular for space with reasonable rent.”
Mui Wo and South Lantau are shaping up as more cost-effective lifestyle alternatives, as rents lag far behind DB. “The lack of infrastructure and schools are one of the main reasons. They are also less convenient and still pretty remote,” adds Edina. As such, the market remains concentrated in luxury Discovery Bay and mass market Tung Chung.
“DB is a little bit different from the rest of Hong Kong, because it targets a very specific clientele, many of whom are pilots that make up a lot of the luxury market,” notes OKAY.com’s Thorsten Allenstein. “I think in that sector we’ve seen a lot of movement lately because of the policies issued by Cathay Pacific restricting housing and limiting budgets.”
Though prices are creeping up, DB is less subject to radical shocks and buying frenzies stemming from developer incentives; it has few new projects. “Discovery Bay is a bit more stable,” echoes Letizia Garcia Casalino, head of residential services at Colliers International. DB is also heavy with lateral movement. “A lot of people already in DB prefer to stay there, particularly if they have children because it’s so difficult to get into the right school catchments.”
Despite DB’s property dominance, the noise coming from nearby Peng Chau is growing. “Peng Chau has received lots of attention lately due to the new Sino residential developments. They have certainly added a facelift to the place, and with such a shortage of housing in Hong Kong, we think it’s a good thing,” says Headland Homes’ director Christine King. “Is this competition for DB? Not really. Peng Chau is a reasonably well-connected island by ferry but it has no real infrastructure, it measures less than 1 square kilometre and has no cars.”
“Should they add a 24-hour ferry and all the other infrastructure, it might become a threat [to DB] one day, but that threat is far, far away,” says Thorsten.
Sales activity has been subdued across the territory due to cooling measures still in place, though a looming interest rate hike spurred transactions in the first quarter of 2018. Mainland purchasers are among the main drivers, along with second homeowners and future retirees choosing to leave Hong Kong or Kowloon behind.
“There are a few more owners who are willing to sell when they get offered a good price, often for a second home or holiday home,” says Letizia, citing a drive to offload assets ahead of potential policy changes and market corrections. “That’s what we’ve seen in Lantau and Lamma,” she notes.
Thorsten agrees that a probable correction is at play, but that it has also stimulated purchases. “People have been waiting for prices to correct. That hasn’t happened,” he argues. “Everyone feels like the market is running away. The economy is strong and people think, ‘If I don’t buy now I never will.’ People wait and wait and then just finally take the plunge.”
The leasing market, such as it is in DB, has been quite active as it responds to tightening corporate belts and shrinking housing allowances (the days of the egregious expat package are over). Budgets that were once in the neighbourhood of HK$80,000 per month have shrunk to HK$50,000, and the former HK$60,000 range is now HK$35,000 per month. Regardless, according to Christine, there is always a high turnover of people coming and going. “I think DB is more popular than ever due to how it connects with Hong Kong, Kowloon and the airport,” she says. “And the future bridge might make a difference for commuters to Zhuhai and Macau.”
She’s right. There is movement within DB, but also notable movement from without, as residents of other premium districts like Repulse Bay and Mid-Levels, where rents can top HK$200,000, begin taking a closer look. There’s been no stampede, but people have to be realistic and they’re starting to expand their horizons.
“It’s not just Tai Tam or Repulse Bay anymore, and many [tenants] are more aware of what Hong Kong has to offer, so they’re willing to make the move,” says Letizia. Edina cautiously agrees that more space, better lifestyle and affordability issues are pushing people to move further from the Central Business District. “The 25-minute ferry ride makes DB more attractive than Sai Kung, Clear Water Bay and the rest of the New Territories,” she reasons. And while Letizia notes that families with school placements could be reluctant to leave, Edina points out the “suburban scenario” isn’t to everyone’s tastes, and “limited [school] choices and long commute times for the children might be another deterrent.”
What the future holds
Taken together – connectivity, infrastructure, limited supply – DB remains Lantau’s, and one of Hong Kong’s prime investment locations. “Discovery Bay is limited in how big it can grow. The government has clearly set a maximum of 25,000 people, and we’re currently just over 21,000. There is only room for 4,000 more people,” explains Thorsten. “So, whoever is a property owner will surely see their value rise.”
However, that interest rate hike and its potential impact on the property market lingers. Yes, there will be a rate hike here as soon the American Federal Reserve raises its own – the dollar peg will see to that – but in a negative rate environment, it would take hundreds of basis points to make a difference in Hong Kong.
“[Rate hikes] are good for a healthier, balanced economy, but such small increases on an already low interest rate are not really deterring buyers from the market,” states Christine. In December, the HIBOR was 1.05%, translating to real interest of 2.15%. An increase of 50 basis points (0.5%) would translate to 2.55% – or HK$200 for every million financed. “Rate hikes affect people who are overleveraged,” adds Thorsten.
In line with rising interest rates are fears of a property bubble. Recent research by Colliers suggests historical data indicates otherwise, and that the 6.9% price gains in the last six months are within acceptable limits. A correction is coming, and no area is outside the scope of one, but DB is slightly buffeted from a severe price plunge because of its modest speculation levels and the Hong Kong Monetary Authority’s hedge against a crash with its 60% loan-to-value ratios.
Christine estimates the only real threats to a healthy Lantau market going forward could be another 2008-style global financial crisis, and agrees with Thorsten that environmental restrictions, particularly in South Lantau, are a second.
“Lantau is undergoing tremendous growth and we hope that this will bring more affordable housing to the people of Hong Kong,” says Christine, theorising tighter ties of the Greater Bay Area could ease the housing pressure in the SAR, especially if it’s in commuter distance.
But DB’s restricted growth potential, the bridge’s positive impact on property (akin to the value bumps MTR expansion provides), and Lantau’s ‘first stop’ positioning all point to a bright future. Add to that considerable historical capital appreciation – 400% since 2003 across Hong Kong – plus safe haven status, and the SAR’s largest island could become one of its hottest property subsectors.
“You can go to many other places in Asia or Southeast Asia, maybe with a little more risk, and do much better than pathetically low yields of 1% or 2%,” finishes Thorsten. “But you know if you buy something here… the lack of yield today will be made up with capital gains over the long term.”
Photos by Katrina MercadoTags: colliers international, discovery bay, headland homes, lantau property, mui wo, okay.com, savills, south lantau, tung chung