For better yields, look to residential market!

Recently, residential rents have regained their upward momentum, we can see this trend by comparing some popular estates between February and June.

According to statistics from Centaline and Midland, the average private residential rent in terms of utility area in June was about HKD 35.24. This is up about 1.5% month-on-month and now at a 10-month high, as the summer rental season approaches. On a semi-annual basis, rents rose about 2.5% in the first half of this year, the first half-year increase since the first half of 2019.

In fact, a rent increase has long been on the cards, because property-price trends generally precede rental trends. In the months leading up to the rent increase, property prices rose first. Because property prices have been stable recently, rents will slowly follow, regaining their upward track, and hit a multi-month high.

Rents have reached new highs on the back of this revelation: Tenants who have the cash, and want to wait for the property market to fall before they get into it, will find the markets are not falling, and now their rent will probably be increasing. This is likely to encourage them to become buyers. They are not likely to put their flats on the rental market but would be more inclined to occupy them.

According to Midland "trend chart" rents rose about 1.5% month-on-month in June to a 10-month high, leading to a rise of about 2.5% in the first half of the year.

With the summer rental peak season approaching, private residential rents have risen even further in June since their May rebound. The average private residential unit rent in June was about HKD 35.24, up 1.5% month-on-month, a 10-month high (see Figure 1).

In the first half of 2021, rentals rose by about 2.5% above the first half of 2020.

We believe that this positive first-half trend in the property market is causing residential transactions to boom, property prices to rebound, and rents to gain upward momentum. 

Looking at actual housing estates, the average rent in Taikoo Shing increased by about 6.7% in the first half of this year; Whampoa Gardens, South Horizon and City One Shatin increased from around 2.2% to about 2.7%; average rents at Kingswood Villas also recorded an increase of 0.4%. 

Properties under HKD 15,000 a month saw their market share drop to about 39.8% , or 0.3 percentage point below the second half of last year. Examples of this would be seen in estates such as Kingswood Villas, City One Shatin and Lohas Park (LP6), (see Figure 3).

Rentals of properties for HKD 20,000 a month dropped to 33.4% of the market in the first half of this year, a decrease of 0.5 percentage points from the second half of last year and a five-year low. This drop is probably caused by the idea that once a tenant needs to pay more than HKD 20,000 in rent, they are more likely to buy a property to take advantage of low interest rates. A flat selling at HKD 6 million would need a monthly repayment of HKD 20,000 (MIP scheme, 30 yrs 90%), and become an investment. Sales figures for homes under HKD 6 million showed an increase of around 11% in the first half of 2021. In the first half of 2020, 14,835 properties were sold, but 16,666 in the first half of this year.

The market share for flats costing more than HKD 20,000 a month rebounded in the first half of 2021, recording an average 26.7% in the first half of 2021, up from about 25.8% in the second half of last year, a one-and-a-half-year high.

At the same time, higher rents will also boost the performance of the property market. If there is a relatively stable and attractive rental return when entering the market, investors or owner-occupiers will find buying more attractive as this will be effective against inflation, making property prices and the property market’s performance less volatile.

Moreover, the current low mortgage rates, and rent increases give the property market a more optimistic outlook. Less volatile medium- and long-term prices make this a good time to review residential markets for a more stable investment.