Wednesday, January 30, 2019

Hong Kong’s infatuation with multimillion-dollar shoebox homes is over as quickly as it began

Known variously as nano flats, micro-apartments and shoebox homes, these abodes are specifically designed to be small, typically less than 200 square feet (18.6 square metres) in size.

Two of every three of these homes built in Hong Kong since 2016 were constructed this year. Of these 976 units that were added, 461 units remain unsold as of this week, according to calculations by the South China Morning Post using data by Dataelements, which monitors the sale of new flats in the city.

The unsold homes, backed by some of Hong Kong’s biggest developers, are what remains of a bull market that until August was the world’s most expensive urban centre to live in.

The infatuation began in late 2014. A supply shortage, combined with mortgage rates that hadn’t budged for a decade, had caused home prices to spiral.

Until nine months ago, it was not uncommon for a dozen buyers to submit bids for every new home on sale. That gave developers the reason to raise prices, sometimes by up to 14 per cent within weeks between different phases of a launch.

As spiralling prices put more homes beyond the reach of first-time buyers, the smallest units – and the only ones within budget – became popular.

Sensing a trend and seizing the opportunity, savvy developers piled in and subdivided what’s already small into the minuscule, setting one record after another for diminution.

CK Asset Holdings, the flagship company of retired tycoon Li Ka-shing, set the trend in motion in 2014 when its Mont Vert project in Fanling sold out in a massive success. The smallest unit, at 165 sq ft, was available for HK$1.29 million after a 15 per cent discount.

A record 976 of these were offered for sale this year in Hong Kong, more than double the 452 last year, and an 18-fold increase from 2013, according to data by Dataelements.

The high-water mark for this segment of the market was set in May, when a 190-sq ft flat at New World Development’s 30-storey Artisan House in Sai Ying Pun sold for HK$6.52 million, or a record HK$34,315 per sq ft.

The bull market began to lose stride in August, after Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor introduced a vacancy tax to force developers to add to the city’s housing supply, while banks began raising mortgage rates for the first time in 12 years.

Faced with a surplus of available homes, developers began offering discounts across all property types, by up to double-digit percentages, to attract buyers, causing prices to spiral downwards.

That changed the consideration for buyers, as larger flats that previously seemed out of reach are now affordable. In such a market, the smallest abodes became the first casualties.

“Whatever comes on during a bull market sells like hot cake, whether it’s a nano flat, or a larger unit, but when the market corrects, those buyers with the budget will prefer to trade up,” said Asia Allied Infrastructure Holdings’ chairman Dominic Pang Yat-ting. “Quality homes with decent sizes of around 600 square feet to 700 square feet” are now the preferred options, he said.

Pang should know. Known as Chun Wo Development until 2016, his company was the mastermind behind the T-Plus apartment complex in Tuen Mun.

Founded in 1968, Chun Wo paid HK$230 million (US$29.4 million), or HK$1,530 per sq ft, in 2014 for the Tuen Mun site. Pang had wanted to build flats smaller than 100 sq ft, selling them for HK$1 million plus each to students at the nearby Lingnan University.

He was persuaded by colleagues to change his plan only because they could not get their construction crew and their tools into the tight space for the interior fit outs, he said.

A graphics representation of a micro-apartment at Mont Vert in Fanling, developed by CK Asset Holdings, which kicked off the trend of building tiny abodes smaller than 200 square feet in size.
Work began in 2015, squeezing 356 units into the 19-storey tower, for a staggering 29 apartments on every floor.

Most of them were between 130 and 140 sq ft, while the smallest few measure 128 sq ft. That’s smaller than the footprint of a standard Hong Kong car parking space (134 sq ft), or a 20-foot shipping container (158 sq ft).

Midway through construction in 2017, Pang sold T-Plus to 84-year old veteran investor Tang Sing-bor for HK$1.2 billion, or HK$7,900 per sq ft. Asia Allied would stay on as contractor to build the project, scheduled for completion in 2019.

A year later, Tang sold 70.1 per cent of T-Plus to Jiayuan International Group for HK$938 million, or HK$8,790 per sq ft. The project would go for sale to the public at more than HK$20,000 per sq ft, with a 131 sq ft flat going for HK$2.85 million.

Criticised by civil advocacy groups as “inhumane,” T-Plus received its comeuppance two weeks ago, when just two apartments managed to find buyers in a sales launch of 27 units.

“We are unlikely to go that extreme in unit size again,” Pang said, after learning of the dismal sales performance.

It was the worst sales campaign Hong Kong had seen in four years. It received such scant demand that sales agents ended the proceedings halfway through the day.

“That was a painful lesson for the developer,” said Prudential Brokerage’s associate director Alvin Cheung. “There is a huge risk in building micro flats, because once the market shows sign of turning, this type of property will be the first to be abandoned by the market.”

T-Plus wasn’t the only tiny home development to get the cold shoulder. At The Esplanade in the same neighbourhood, Chuang’s China Investments sold four out of 150 nano flats two weeks earlier. One buyer paid HK$2.88 million for a 162 sq ft unit, while the remaining three that sold ranged from 201 to 343 sq ft.

Two sales slumps over a fortnight was a clear sign to developers that the trend had changed.

“Micro-apartments were the story of a booming market, but now it is different,” said CGS-CIMB Securities’ property analyst Raymond Cheng, adding that developers would get “burned” if they do not slash the prices of these tiny flats.

To be sure, the signs were already there. In mid-November, Hong Kong’s Lands Department ordered Filipino tycoon Lucio Tan’s Eton Properties to put a hard stop to leasing its co-living space at 53 Shouson Hills. Eton had converted three luxury projects into more than 500 subdivided units, each measuring between 60 and 1,200 sq ft to rent out to young professionals, starting from HK$4,000 each. The authorities ordered Eton to return all 18 flats to their original design.

This week, Lam’s administration offered 2,545 subsidised housing in Cheung Sha Wan for sale, at discounts of up to 58 per cent to market price, offering the smallest 184-sq ft unit for HK$930,000. To qualify for the government’s subsidies, an applicant cannot earn more than HK$11,540 per month or own more than HK$249,000 in assets while the threshold for a couple is HK$17,600 in monthly income and combined assets of HK$338,000.

“Prospective buyers can now take a wait-and-see attitude because the market’s correction allow them to buy a bigger size, up to 300 sq ft, with the same budget,” said Angus Chan, chief financial officer of Far East Consortium International, whose Aspen Crest project in Diamond Hill comprises flats from 198 to 654 sq ft.

For those who did jump into the market, it’s a case of buyer’s remorse as they must now deal with the combination of declining resell prices and rising mortgage rates. Negative equity, where the value of a property is less than the loan amount, has returned to Hong Kong, after the last round took more than a decade to stamp out.

For Joshua Lin, 27, and his wife, his biggest worry now is how to squeeze his possessions into his new home at One Prestige in North Point. He took out a 30-year loan to pay for half of the HK$4 million cost of his 160-sq ft flat, after his parents helped him with the remainder. Monthly mortgage payments are about HK$8,500, he said.

“It’s a challenge to fit a bed and a wardrobe into such a tiny apartment,” Lin said, looking at a living room that measures 97 sq ft. Up to 80 per cent of the 128 units in that 30-storey tower are micro-apartments.

Some property agents have suggested that Lin should turn his studio into a loft, by elevating his bed above the floor to fully utilise the space underneath as living quarters.

Hong Kong’s property prices are heading for steep declines of between 10 and 20 per cent in 2019, according to forecasts.

Micro-apartments are poised for the steepest slumps of up to 30 per cent, as there are an estimated 20,000 “shoebox sized” flats in the pipeline to weigh on the market, according to the same developer that got the whole trend going.

“The price of the smallest flats would suffer the most because the segment is already saturated,” said CK Asset’s executive director Justin Chiu Kwok-hung, stressing that he is merely expressing his personal viewpoint.

That may be too late for Mandy Smith, who will be leaving Hong Kong next June after a two-year stint as a teacher, because she finds the living conditions in the city way too dismal.

“I could not imagine Hong Kong’s homes being so expensive, where people live in such tiny space, before I set foot here,” said Smith, who looked at 32 flats around the city before finally settling on a 227-sq ft apartment at AVA128 in Kennedy Town. She is paying HK$15,000 a month in rent, more than double the US$900 (HK$6,200) she used to pay for a 1,500-sq ft space.

“I hate it because it is too small,” she said. “I cannot have a couch, it’s hard to cook here and I cannot get friends to come over.”

22 owners’ bid to keep fixed awnings at EC rejected

Faced with the prospect of killer litter falling into the private enclosed space of their ground-floor units, 22 owners applied to the Strata Titles Boards (STB) for an order to allow fixed metal awnings to be erected.

But the STB turned down their application, saying that retractable awnings would serve the purpose.

It ruled that the management corporation's (MC) approval for a retractable awning as a safety device is justified.

"The installation of a retractable awning is a necessary, reasonable and proportionate response to the killer litter problem," said the STB tribunal presided by Mr Alfonso Ang, with members Dr Tang Hang Wu and Mr Chng Beng Guan in decision grounds last month.

The 11 ground-floor units are at the Belysa, an executive condominium development in Pasir Ris Drive 1.

All the applicants had installed fixed awnings within the enclosed space of their respective units, anchored to concrete ledges that protrude out of the external walls.

The STB accepted that the strata development faced a killer litter problem, noting that numerous items such as a knife blade, aluminium poles, glass shards and even a tennis racket had dropped into the ground-floor units.

The relevant by-laws of the Building Maintenance (Strata Management) Regulations 2005 allow the installation of safety devices but also provide that any "safety device" must still adhere to guidelines prescribed by the MC. The MC's guidelines permitted retractable awnings.

The applicants' lawyer, Mr Toh Kok Seng, argued that the issue for the STB was whether the shelters are in fact safety devices which improve safety within the applicants' lots. He added that the presence of alternatives does not change the answer to be decided.

The MC's lawyer, Ms Teh Ee-von, countered that the applicants should use retractable awnings instead as fixed awnings annoyed second-floor unit owners as "they reflect heat, block the view and are noisy when it rains".

"The fixed shelters trap dirt and are an eyesore especially because they are not regularly cleaned," she added.

The STB found, after reviewing the evidence, retractable and not fixed awnings were the right response to the problem. It said that the MC had, in opting for retractable awnings, to juggle competing demands from different unit owners who may have conflicting interests.

It cited the "compelling evidence" of one second-floor unit owner who said the presence of the fixed awnings has led him to not be able to enjoy his balcony, made him suffer from depression and feel helpless.

Expressing appreciation that the applicants had installed the fixed awnings "in the good faith belief that this was the best option to protect themselves and their families", the STB explained that they must balance their needs with those of the other unit owners.

"The Board urges all parties to repair and reconcile their relationship after this application because parties are in an 'enduring property relationship'."

It added: "People who live in condominiums must out of necessity work closely with each other to make a condominium association function", quoting leading property scholar Chen Lei.


These days, you can’t go five minutes on Facebook without being spammed by an “Own 20 properties with no cash down” ad. Is it an outright scam? The answer is no (at least not outright) – but there are serious financial risks to consider. Also, it’s something of a legal grey area. Here’s how it works:

What do the ads mean by “owning 20 properties”?

When the ads say “own”, what they really mean is co-ownership of several managed properties. These schemes rely on getting a group of investors to pool their money together, and buy up a range of properties (mainly commercial, for reasons we’ll explain below).

The money from investors is then handled by a manager (or group of managers), who choose which properties to buy with the money. Rental income from the properties is then shared out among the different investors. The managers are typically paid with a cut of the total revenue generated by the properties (but the method and amount of payment can vary between the different groups).

This is what the ads really mean when they claim you “own” the group of properties. It doesn’t mean that you can take reverse mortgages on those properties, or will the actual buildings to your children. The only real benefit you’re receiving is the rental income.

As for the “no cash down” part, this is true in the sense that you don’t make down payment on any of the properties. But of course, you need to commit your cash to the scheme. This is usually on a monthly basis, but can sometimes include upfront payments or other “administrative fees”.

Now if you’re savvy about the property market and various investment schemes, you’ll be saying…

Hang on, this sounds like a REIT
Spot on! In principle, these schemes operate similar to a Real Estate Investment Trust (REIT).

However, they differ in many substantial ways. Chief among them is the fact that REITs are listed and hence regulated; but these schemes could be…let’s just say “more loosely run”. We’re notsaying they’re all scams. But there are fewer watchdogs to keep them in line.

It’s also a legal grey area, whether these schemes should be allowed to operate as a REIT without the pertinent licenses.

We do expect that the government will come around to clarify things. At the time of writing, however, these schemes are not illegal.

Why do these schemes mainly involve commercial properties?

The two main reasons are:

There is no Additional Buyers Stamp Duty (ABSD) for commercial properties. There is still a Goods and Services Tax (GST), but this is much lower than the ABSD.
Commercial properties provide higher yields than residential counterparts. In the current market, residential units are hovering at rental yields of around two to three per cent. Commercial properties reach between three to five per cent.
In particular, old commercial properties have very high rental yields – sometimes exceeding seven per cent. This is due to their low overall cost (from an expiring lease), coupled with rental income that is unaffected by the lease (tenants don’t care about the remaining lease).

Also note that, if borrowing is involved, the LTV for commercial properties is much higher. For example, you may have seen bank ads offering up to 120 per cent LTV (although that is actually a combination of a Working Capital Loan plus the property loan). Financing is thus easier for commercial properties.

Finally, just as we like to do with residential properties, commercial property investors like to bank on the chances of en-bloc sales.

Overall, it does make good sense for these schemes to go for commercial rather than residential properties. But this can also be a drawback to regular investors, who don’t understand such properties (see below).

What are the main issues with these schemes?
As we’re not Financial Advisors, we’re in no position to advise you for or against these schemes. But we can point out some key concerns, from a property perspective:

You have to consider the consequences if fellow co-owners don’t pay up (if loans are involved)
Regular investors find it hard to gauge the competence of the scheme’s manager(s)
It’s difficult to sell off your share of the scheme
There’s no guarantee that current rental rates will continue
The schemes may add an unnecessary level of risk, compared to just buying regular REITs

1. You have to consider the consequences if fellow co-owners don’t pay up (if loans are involved)
Not all the schemes use financing to buy properties. Some of them just buy the properties in cash, in which case there’s little risk of rising interest rates, defaults, etc.

But if there are loans involved, you need to ask what happens if some of your co-owners decide to stop paying. Will you be left to pick up the slack? Or will the entire scheme just wash out like a sandcastle at high tide?

The legal consequences can be complex where loans are involved; and you should check the terms and conditions with a legal professional.

Even if there are no loans involved, you need to know what will happen to your money if the scheme is dissolved for some reason (e.g. the manager messes up and the properties start generating high losses).

These issues pose a serious financial risk, and you should consult a financial planner/wealth manager before you even consider them.

2. Regular investors find it hard to gauge the competence of the scheme’s manager(s)
This is often marketed as a plus point: the scheme will tell you it’s better to let an expert manage the property, as you know nothing about it yourself.

But how do you gauge an expert if you’re not an expert yourself? For all you know, the “expert” could be someone who failed their way out of a proper REIT. Even if you can look up, say, the managers’ 15-year track record (usually you can’t), would you really understand how to gauge their performance?

And remember that, if the managers mess up and the scheme implodes, they don’t have to pay you back one cent of their fees. It’s your money they’re playing with.

3. It’s difficult to sell off your share in the scheme
These are not stocks, which you can quickly sell off by tapping parts of your phone screen. If you want to pull out of the scheme, you need to find someone to buy over your share.

You’ll really need a property agent then. To sell your house, that is, because there’s probably no way to get out of this if the scheme starts falling apart (who is going to buy over a share of a collapsing property scheme?)

4. There’s no guarantee that current rental rates will continue
Be aware that the attractive rental yields right now may not continue.

In retail, stores are increasingly moving to e-commerce. In business, a growing number of companies are opting for co-working spaces, rather than three-year leases in conventional offices. Meanwhile, slowdowns in the global economy will take their toll on logistics and manufacturing – this will impact rental yields for warehouses and factories.

In short, rents can go down, and vacancies can increase.  Take a long term view of the market, and don’t be dazzled by rental yields at the present.

5. The schemes add an unnecessary level of risk, compared to just buying regular REITs
This is the biggest and most important question:

Short of less protection, what do you get from buying into these schemes, rather than, say, a better regulated REIT? The two operate the same way, but a commercial REIT is more highly capitalised, has a more transparent track record, and is easier to buy or sell.

Again, talk it over with a financial advisor before buying.

Wednesday, October 31, 2018

Falling HDB Resale Prices A Thorny Issue For Singapore Government

HDB resale prices could slide by up to 2.0% this year.

There could be severe political ramifications if the Singapore government fails to adequately address the downtrend in the prices of HDB resale flats and the loss of their value as the lease dwindles, reported Bloomberg recently.

“The government has to walk a tight rope on this,” said ZACD Group research head and executive director Nicholas Mak, who expects HDB resale prices to slide by 1.0 percent or 2.0 percent for the whole of 2018.

Find HDB flats for sale or read our HDB guides and BTO guides

The authorities can neither extend the leases of HDB flats “for free” nor let prices of such properties fall too much, he explained, as its impact on the wealth of homeowners could have serious political consequences.

Cushman & Wakefield also thinks that the fall in values would not only dampen public sentiment, but could also negatively affect demand for private homes as fewer HDB flat dwellers will feel comfortable enough to upgrade to private condos.

Previously, an HDB flat purchased for around $72,500 in 1985 is now selling for about six times that amount, translating to annual compounded price growth of 5.6 percent.

However, the value of HDB resale flats has been declining, while that for private residential properties has recovered in the last five quarters. This has resulted in a price gap of 13.8 percent, or the biggest in over 10 years.

Latest data published last Friday (26 Oct) by the Housing Board also shows that the HDB resale price index slid 0.1 percent quarter-on-quarter in Q3 2018. This took place even though the number of resale transactions rose 18.9 percent quarter-on-quarter and 21.6 year-on-year to 7,063 cases.

Nonetheless, the government is carrying out measures to tackle this issue. Among them is the Voluntary Early Redevelopment Scheme (VERS), which will allow homeowners to vote on whether to sell their HDB flats to the government once the age of their block hits 70 years before the 99-year lease ends. However, Credit Suisse said VERS won’t be implemented for another 20 years and won’t apply to all HDB flats.

Meanwhile, the Housing Board announced that it will offer around 3,800 Build-To-Order (BTO) flats in Yishun, Tengah, Tampines, Sengkang and Sembawang next month. It will also hold a concurrent sale of balance flats.

In particular, those buying BTO flats in Yishun, Sengkang and Sembawang will have a shorter waiting time of 2.5 years instead of the usual three to four years.

URA guidelines change for new condos: All you need to know

SINGAPORE: On Oct 17, the Urban Redevelopment Authority (URA) - Singapore’s urban planning authority - announced several new guidelines for condominium developments that would take effect early next year.

Among other things, the rules included reducing the maximum number of units allowed in new condominiums outside the Core Central Region (CCR) of Singapore.

The reasons behind the URA guidelines change? To discourage developers from building shoebox units, counter shrinking condo unit sizes overall and hopefully “manage potential strains and stresses” on Singapore’s infrastructure.

For developers, this is bad news. Lowering the maximum number of units can mean eating into their potential profits down the road. But what can homebuyers expect? Read on to know all about the new rules and the implications:

New URA guideline #1: Maximum dwelling units lowered
Before: The formula used to calculate the maximum number of housing units allowed in developments outside the CCR is gross floor area (GFA) in square metres divided by 70 sq m (GFA/70 sq m).

Now: The formula is now updated to be (GFA/85 sq m). Given the same GFA and assuming developers maximise their GFA quota, this translates into about 18per cent fewer units being built per development.

Why: According to URA’s group director for development control, Ms Goh Chin Chin, this allows developers to provide a more balanced mix of unit sizes. The goal is to cater to the diverse needs of home buyers, not just investors.

Implication for homebuyers: Average unit sizes of new launch condos will increase down the line. As cheaper shoebox-sized units may be a thing of the past, property investors with limited budgets might be priced out of an investment, unless they turn to resale.

Even those who can afford the larger single-bedder units might work out a diminished rental yield, because while the bigger square footage costs more, it might not justify a higher rent in the rental market. Meanwhile, those buying homes for their own stay might welcome the fact that new developments will be less cramped.

For buyers who are worried that developers might increase their prices to recoup lost profits, let’s just say that, after the July cooling measures, developers are aware that raising prices — by raising the per square foot (psf) price — would be akin to shooting themselves in the foot multiple times. Buyers might have to pay a higher absolute price for slightly bigger square footage of the larger units, but in psf terms they’re unlikely to get a worse deal.

Plus, if the market is indeed cool, developers might even be forced to sell at a lower psf price in order to keep the absolute price of units affordable.

New URA guideline #2: More precincts with special maximum unit controls
Before: Four areas are subject to special requirements when it comes to maximum unit controls. These areas are: Telok Kurau, Kovan, Joo Chiat and Jalan Eunos. In these estates, the GFA is divided by 100 sq m (GFA/100 sq m) to arrive at the maximum units allowable.

Now: Nine areas have to adhere to the special maximum unit controls. These areas are: Marine Parade, Joo Chiat-Mountbatten, Telok Kurau-Jalan Eunos, Balestier, Stevens-Chancery, Pasir Panjang, Kovan-How Sun, Shelford and Loyang.

Why: While URA hasn’t said so explicitly, it’s likely they want to maintain the low-density profile of these neighbourhoods. It happens that these neighbourhoods are characterised by networks of small streets/narrow roads, hence stricter maximum unit controls are needed to prevent new developments putting undue strain on infrastructure in the future. Think of this as a preemptive measure of sorts.

Implication for homebuyers: Those who are looking to live in a more laid-back neighbourhood for decades to come now know where to look. They can also be reassured that if they do want to sell or rent out their homes in these areas further down the road, they wouldn’t face much of an oversupply issue. But note that because of the maximum unit restrictions, properties in these precincts will be less attractive en bloc options for developers too, so it’s a double-edged sword.

New URA guideline #3: Allowance for indoor communal spaces (Bonus GFA scheme)
Before: No such guideline/scheme in place.

Now: Under the bonus GFA scheme, developers may build indoor recreations spaces such as gyms, libraries, function rooms and reading rooms, and apply for these to be counted as bonus GFA.

The maximum bonus GFA is capped at 1 per cent of total area for residential developments, or the GFA of the residential component for mixed-use developments. Take for example a project the size of Kent Ridge Residences, with a GFA of 41,490 sq m. The bonus 1 per cent GFA is equivalent to about 415 additional indoor sq m, about the size of a basketball court.

Why: Again, URA hasn’t said so explicitly, but we see this as a move to increase neighbourliness and kampung spirit within condo compounds with more common spaces.

Implication for homebuyers: They can expect more indoor facilities in future new launch condos. With fewer units and more facilities, we think condos will become better living environments. More indoor facilities will also mean greater utility, as these can be used regardless of the weather.

New URA guideline #4: New rules for balconies
Before: Back in 2001, URA stipulated that private developers could build additional space over the maximum development intensity to make allowance for balconies for residents. More specifically, the GFA of residential developments could be extended by 10 per cent, with the caveat that the additional space should be designated purely for a balcony.

There was also no minimum width requirement for balconies, so certain projects ended up with balcony spaces that look more like oversized planters.

Now: The bonus GFA cap for private outdoor spaces will be reduced to 7 per cent. On top of that, the total balcony area for each unit will be capped at 15 per cent of the net internal area. Balconies must also now have a minimum width of 1.5 metres so that the outdoor space can be used meaningfully by residents.

Why: URA has observed that some developments now feature excessively large balconies in relation to the size of the unit’s indoor spaces. (Moreover, the common sentiment is that home buyers find it difficult to look for units without waste-of-space balconies.)

Implication for homeowners: They can look forward to better-proportioned homes with balconies that have greater utility. Hopefully, we’ll see the end of shoebox units with balconies the size of a bedroom.

How will the latest URA guidelines impact buyers?
The new URA guidelines are likely to bring about larger unit sizes (and possibly lower psf selling prices), and they definitely favour homebuyers over investors.

Considering that we can expect an influx of new units fuelled by the recent en bloc fever, this is a timely move to curb oversupply and overcrowding. If you’re thinking of buying a condo in the next few years, it’s time to rejoice.