In the latest Colliers Snippet, Valuation and Advisory Services Director Jason Fung expects developers and investors to be scouring the market for ways to escape the Government’s 280 sq. ft. rule, and Capital Markets and Investment Services Director Freddy Wan shares the returning potential for hotel investment.
Buyers are snapping up tiny homes
Developers and investors need to be scouring Hong Kong for old buildings or farmland for sites to construct nano flats. Homebuyers with limited budgets are scrambling to buy homes off-plan, especially those under 250 sq. ft, since the Government announced that the smallest home it would approve would have a saleable area of 280 sq. ft. On 20 December 2021, Secretary for Development Michael Wong announced that the measure would be introduced in the fourth quarter of the 2021-2022 financial year when a residential site in Tuen Mun would be tendered. The site is expected to yield 2020 flats.
Wong added that when considering the restriction, the Government had taken into account the minimum flat size requirement of 23 m² (around 250 sq. ft.) in saleable area for the Starter Homes for the Hong Kong Residents pilot project on Anderson Road in Kwun Tong. The Tuen Mun site is for private residential housing, the next rung up the homeownership ladder, so the minimum requirement should be higher than subsidised housing.
Meanwhile, the Mass Transit Railway Corporation plans to sell by tender a development project at Pak Shing Kok Ventilation Building which can provide about 550 flats. The MTRC will also adopt the minimum size rule.
The Government plans to apply the flat size restriction to all the residential plots it puts up for sale in the next financial year after the rise in property prices has led developers to build tiny units to make them more affordable.
Residential property below HK$8 million is eligible for up to 90% mortgage financing, which is the current price tag for primary residential units below 280 sq. ft. in Hong Kong Island, 320 sq. ft. in Kowloon or 400 sq. ft. in the New Territories.
Young homebuyers moved quickly to secure small residential units in the first week of 2022. Soyo, a residential project developed by Chun Wo Development Holdings in Mongkok, had 120 nano flats for sale between 152 and 228 sq. ft. The cheapest was priced at HK$3.38 million, and 35 units sold for less than HK$5 million in the first weekend after the Government announcement.
"Soyo, a residential project developed by Chun Wo Development Holdings in Mongkok, had 120 nano flats for sale between 152 and 228 sq. ft"
According to provisional figures from the Rating and Valuation Department, about 13% of completed private residential units have been smaller than 26 m² (280 sq. ft.) in the past five years. Since 2019, 76 primary residential projects offered nano flats, of which only 37% were tender awarded, with the remainder coming from redevelopment and farmland conversion projects.
Of the 24 projects with units under 200 sq. ft. mainly located in Hong Kong Island and Kowloon, only five are tender awarded, and the remaining are redevelopment projects. Clearly, land tenders are not a major supply source of nano flats; therefore, the new rule will not significantly impact future supply.
What will be affected is affordability as developers are forced to build more expensive homes. They will also have to face slower sales in the primary market, as higher prices decimate potential buyers. Under such circumstances, developers need to consider speeding up their pace of acquisitions, redevelop old buildings in urban areas, and convert farmland in the New Territories.
It’s time to revisit hotels as potential investments
While hospitality was deeply affected by the pandemic and the resultant dearth of tourists, Hong Kong’s resilient operators and investors pivoted to various innovative strategies to ensure their survival. Almost all lowered their room rates to a minimum to maintain occupancy and keep their businesses running. Several with good facilities offered staycation packages to ease the pressure on working capital, and some, with limited services, became quarantine hotels.
With more affordable hotel rates, local residents have found a way to dodge Hong Kong’s norotriously high rents and moved in for a long-term stay, prompting investors and funds to partner with local co-living space operators to convert acquired hotels into long-term rental models.
As expected, the market was muted in the first half of 2021 but picked up in the last two quarters, reaching a transaction value of HK$4.46 billion, the highest it has been since the pandemic started. One significant deal was the sale of Hotel SAV to Global Real Estate fund manager AEW for HK$1.6 billion.
"the market was muted in the first half of 2021 but picked up in the last two quarters, reaching a transaction value of HK$4.46 billion"
An increasing number of fund and investment managers intend to partner with co-living or hotel operators, leveraging their experience to deliver risk-adjusted returns. This path allows stable returns in the short term, and investors are optimistic that tourism will bounce back once the border opens. They expect demand and hotel rates to increase significantly.
Whilst uncertainty remains, particularly due to the lack of inbound travel to Hong Kong and the Omicron variant enforcing the implementation of restrictions, sentiment remains strong, with value-added investors primed to take advantage of the opportunities that may come available to the market.
This is an excellent time to find affordable hotels for long-term investment.