Hong Kong investors know very well that ‘minibonds’ aren’t exactly bonds. That lesson was learned in 2008, when $3 billion worth of these structured credits collapsed in value after Lehman Brothers imploded. Thanks to the territory’s richest man Li Ka-shing, they are now presented with a similar question: when is a hotel room not a hotel room?
It is a rather embarrassing question for a city that’s globally renowned for its property obsession and its unerring ability to classify real estate categories. Of course, condo-hotels are common elsewhere. In 2006, Donald Trump even unveiled the Trump SoHo project in his TV show The Apprentice. The idea was to sell hotel suites – at prices cheaper than Manhattan apartments – to investors who wouldn’t stay in them more than 120 days a year. The rest of the time the units would be operated as hotel rooms with the developers and investors sharing the profit.
Last week in Hong Kong, Li’s property flagship Cheung Kong decided to offer a similar crash course on real estate innovations by selling an out of town hotel, namely Apex Horizon, to individual investors. (Cheung Kong claimed it pioneered the move. That’s not strictly so. Wong Kwan, a chef-turn-entrepreneur who attained global headlines in 1997 for acquiring ‘the world’s most expensive single house’ on Hong Kong’s Peak – the Genesis – tried the same strategy 15 years ago. The hotel in question subsequently foreclosed.) In a toppish residential market, all 360 units were sold by Cheung Kong in less than two days for a handsome $180 million.
Financial innovations usually come with confusions. Just like bank clerks marketing ‘minibonds’ before 2008, the bulk of Hong Kong property agents aren’t too familiar with buyers’ rights and sellers’ obligations in hotel condominiums. It took four years before Trump SoHo landed its developers in legal disputes on allegedly deceptive sales practices. Cheung Kong’s condo-hotel attempt ran into similar troubles in less than a fortnight. Four buyers went to the Hong Kong police for help earlier this week.
“I trusted Li Ka-shing that this would be okay,” a woman investor told the South China Morning Post. “But now, the lawyers’ advice differed from what Cheung Kong has said… I’m not sure if I’ve been cheated.” Reportedly investors were told they could reside in the hotel rooms themselves but lawyers have suggested otherwise.
The Apex Horizon sales have caused massive controversy in Hong Kong. Angry web users claimed Cheung Kong was circumventing heavy stamp duties (equivalent to 15% of the value of the home) imposed late last year on non-local homebuyers and property speculators in a bid to tame a bubble. Legislators criticised the developer for exploiting loopholes in the city’s zoning rules which don’t stipulate clearly that certain hotel properties can only change hands as a whole, rather than room by room.
Regulators weighed in aggressively too. Top officials repeatedly warned of regulatory risks for home seekers in acquiring hotel suites, threatening to seize the hotel properties in question if land use regulations are violated (i.e. if they are permanently lived in, rather than rented out fractionally). And a few days after the Apex Horizon was sold to the public, the government made clear its frustration: it doubled stamp duties for ‘second’ home sales, and extended them to cover non-residential transactions. In this latest tax hike, Hong Kong residents and not just mainland Chinese and foreigners were targeted – unlike in the earlier measure.
Chief Executive CY Leung, a real estate professional himself (he’s a veteran surveyor) also took the unusual step of commenting on the project. “The buyers didn’t buy a flat or divided ownership. They don’t even possess the exclusive right of use,” Hong Kong’s leader warned, adding that he had instructed all related departments, including planning, hotel management, consumer protection and fire services to follow up the case closely.
Given the backlash, why did Cheung Kong do it? “The brutal war between developers and the government is reaching the finale,” the Hong Kong Daily News wrote bluntly.
WiC readers should be familiar with Hong Kong’s latest political tussles. Li is a known supporter of Leung’s election rival, Henry Tang (see WiC144). Ever since the divisive and scandal-plagued leadership battle last year (see WiC140) rumours of a face-off between Hong Kong’s top official and its most prominent tycoon have never subsided. Noting that Leung has staked his credibility on stemming the flow of hot money into the overheating residential property market – a political hot potato that sees an angry middle class complain they can no longer afford to buy a flat – a Ming Pao editorial suggested the latest Cheung Kong move “reinforces the perception among critics that Leung cannot get anything done”. That is to say, by so blatantly outmanoeuvring government policy, Li’s hotel scheme makes Leung look weak.
Then again, business is business, after all. Li’s hotel sale has actually reminded policymakers that a practical solution exists to boost housing supply. If other hotels with similar zonings to the Apex Horizon could be sold as condos, tens of thousands of housing units would become available – perhaps curtailing residential prices (Cheung Kong itself has nearly 5,000 such hotel units). “The shortage of residential supply would disappear overnight, if the buyers dare to bear their own risks and don’t blame the government,” reckoned the Hong Kong Economic Journal.
Meanwhile with the government and Cheung Kong seemingly at loggerheads, the city’s business landscape has been jolted. Other local tycoons will have watched Li’s gambit closely. Will they also come up with creative schemes to beat the government’s cooling measures?
The Hong Kong press remains amazed by the event. “Cheung Kong is selling an investment product that isn’t better off than the Lehman minibonds, but still attracted brisk sales and brisker resales,” the Apple Daily commented. “Is there anything crazier than this?”
Keeping track: What defines a hotel? The question has been exercising the finest legal and regulatory minds in Hong Kong in recent months. As we reported in WiC183, one of the territory’s prominent developers sold 360 ‘hotel suites’ at its Apex Horizon complex, telling buyers that they could live in them full time. That suggested they were really apartments, and that the whole thing was a ruse to help buyers avoid a new residential stamp duty imposed by the Hong Kong government to cool the real estate market.
The developer in question – controlled by Hong Kong’s richest man Li Ka-shing – raised HK$1.4 billion ($180 million) from the ‘hotel’ sale, but the government then called foul. And the debacle reached its conclusion this week when Li announced that Cheung Kong was rescinding the sale and would refund buyers in full, covering all their costs.
This came after Hong Kong’s regulator, the SFC, said it would take the company to court.
Cheung Kong executive director Chiu Kwok-hung was then quoted in the South China Morning Post as giving the following explanation: “We did nothing wrong. But we think we should support the government in their administration according to the law… society now needs harmony.” (May 17, 2013)
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