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Budget crunch

The expected spike of leasing activities in the luxury property sector did not occur in the traditional high season of May-July. In the past, this high season accounts for about half of annual turnover, because summer is traditionally when most expatriate families relocate to Hong Kong to dovetail with the school semester. This year has seen more leavers than comers, resulting in a much weaker rental demand and high vacancies.

Properties with monthly rental values above HK$200,000 are the hardest hit. Many multinational corporations have trimmed their work force. For those who still remain on the pay roll, housing budgets have been significantly slashed. Bearing the brunt is financial industry, which has seen lay-offs across all segments, and even the relative safe (in recent years) private banking sector is not exempt. Many tenants have tried in vain to renegotiate with their landlords for reductions in line with the cuts in their rental budgets, which have been generally in the region of 20 to 30 per cent, and in some cases, 50 per cent.

Reductions of this magnitude are hard for landlords to swallow. Break-leases are the order of the day and, as a result, many large apartments and houses have been left vacant, sometimes for up to 9 to 12 months before being taken up, albeit at a much lower rent than the initial asking price.

Major landlords have been quick to respond to the situation by offering more tenant incentives such as rent-free periods, decoration and furniture allowances, and high commission to property agents. Individual landlords have been slower and less generous and therefore often face longer vacancy periods.

Tenants who previously occupied $200,000 pcm properties are moving down the ladder in droves, but landlords on the lower rung of $100,000 to $180,000 are not benefiting because their tenants are moving even further down the ladder. The result is a sudden shortage of rental properties in the range of $50,000 to $80,000. However, this is not likely to create upward rental pressure for properties in this range because there are plenty of options available further down the rental pyramid.

Looking ahead, the luxury rental market will take much longer to improve as there is no sign of the next wave of hiring sprees. In fact, there is growing downward pressure generally, what with the Euro debt crisis dragging the world economy down with it. Softened rentals will further reduce investment yield on real estate, making it unattractive compared to other investments. This will effectively cap the growth potential of sale prices, which are already at a level beyond the reach of most local middle and upper middle class buyers, as cash-rich buyers from the mainland have also reduced significantly in the last 12 months.

By Koh Keng-shing