Prime residential development land prices in Asia slowing

The price of prime residential development land in Asia slowed to 1.1% in the first half of 2015, down from 3% in the previous six months, but prime office land increased to 3.6%, up from 2.5%.

The latest prime Asia development land index from international real estate firm Knight Frank also shows that Phnom Penh in Vietnam recorded the strongest increase in both prime residential and office land price.

Prime residential and commercial land prices surging by 14.1% and 9.7% respectively. The report says that foreign investment continued to fuel strong performance in the residential sector but growth decelerated in the second quarter, suggesting that prices are peaking and the momentum will likely moderate in the second half of the year.

Land sales in China plummeted by 54.8% year on year at a time when local governments in the country reduced land supply and maintained aggressive pricing as this is their main source of revenue.

‘As a result, developers in China face a double whammy of high land prices and weak sales. With the recent stock market crash, their ability to raise capital is further restricted. Anecdotally, more developers are partnering other firms to pool financial resources and pursue an asset light strategy,’ the report explains.

‘However, there is a silver lining as a recent survey conducted by China Household Finance and the Survey Centre registered signs of capital leaving the stock markets for the housing sector in the second quarter of 2015,’ it says.

‘Against this backdrop, along with a nascent recovery in the residential markets, land prices rose moderately in Beijing, Shanghai and, to a lesser extent, Guangzhou. Moving forward, land prices will continue to be supported by these factors,’ the report adds.

Both residential and commercial land enjoyed robust capital appreciation in Hong Kong. The report explains that in addition to the existing healthy demand extra cooling measures, such as a lower maximum loan to value ratio and debt servicing ratio introduced in February 2015 targeting the mass residential market appeared to have channelled demand to the luxury sector. Office space continued to see strong leasing demand from financial institutions amid limited supply.

Demand for land is set to increase when the ASEAN Economic Community (AEC) gets underway at the end of this year. The report explains that as a result of a freer flow of goods, services and skilled labour could encourage the movement of industries, driving demand for both commercial and residential space.

In Bangkok, the price index for office land stalled in the first half of 2015 as developers turned their attention to the luxury condominium market, where continued capital appreciation afforded them higher profit margins. Even so, the prices of residential land grew at a slower but more sustainable pace.

Jakarta saw a similar deceleration in price index movements. The economic slowdown has hurt both business and consumer confidence in the country, according to the report. ‘In addition, the government lacks the room to manoeuvre, as fiscal spending on infrastructure looks to be hampered by a significant shortfall in tax receipts while monetary policy is constrained by elevated inflation and current account deficit,’ the report points out.

‘The residential market was further tempered by a proposed luxury tax hike. Commercial land, on the other hand, still enjoyed healthy price growth. Going forward, despite the headwinds, land prices at prime locations are expected to hold their ground,’ it adds.

High end housing markets in Kuala Lumpur and Singapore continued to soften due to the confluence of ongoing macro-prudential policies, cooling measures, strong supply and, in Malaysia’s case, the implementation of a Goods and Services Tax.

According to Knight Frank’s prime global cities index prime home prices in the two cities slipped for three and eight consecutive quarters respectively. This has weighed on prime land prices. Meanwhile, commercial land remained resilient in both markets.

Tokyo saw a demand/supply imbalance drive prices of commercial land higher while prime apartments in Delhi and Mumbai in India are affected by the pressure of high unsold inventory and increased construction costs which has resulted in a decline in Knight Frank’s residential land price indices.

On the commercial side, prices in Mumbai were further affected as developers wait on the side lines before the revised Mumbai Development Plan 2034 is unveiled. The report suggests that political deadlock, especially when it comes to the contentious reform on land acquisition act, has resulted in 64.1% less investment year on year in India.

While foreign purchase of land in the region as a whole also slowed, regions in Southeast Asia saw a fourfold jump.