Talking Point

Reaching their Peak

Might Hong Kong property be set for a fall as China demand dries up?

Skyline of Hong Kong is seen through a fence at the Peak in Hong Kong

Feeling toppy? Some analysts reckon Hong Kong property prices could fall 20-30%

Back in the 1980s Hong Kong’s busiest shopping districts were dominated by Japanese department stores. Retail giant Yaohan even moved its international headquarters to the British colony in 1991. In the same year its boss Kazuo Wada plonked down HK$85 million ($11 million) to buy the luxury mansion that had once housed HSBC’s taipans. Named Skyhigh, it sat atop Victoria Peak and enjoyed 360-degree views of the territory. Wada paid a Hong Kong record for his new home but the purchase marked the beginning of the end of Yaohan as a retail empire, which began to crumble because of overexpansion. In 1997 Wada was forced to sell Skyhigh for HK$375 million, setting another record for Hong Kong’s most expensive home.

At the time of the sale China was months away from taking back sovereignty of Hong Kong. A housing shortage, coupled with increasing flows of capital from the mainland, had pushed real estate prices skywards. The new owner of Skyhigh, Wong Kuan, was a chef-turned-developer with close connections to mainland Chinese financiers. The transaction proved to be another watershed, marking the onset of Wong’s decline, as well as that of the Hong Kong property market in general, which crashed with the unleashing of the Asian financial crisis. The house was seized by creditors and sold to comedy superstar Stephen Chow in 2004 for about HK$320 million.

Since then the storied property has been redeveloped into four smaller houses and it is no longer called Skyhigh. Yet it remains a miniature image of the boom-and-bust cycles of the Hong Kong economy in which property analysts look up to the Peak for signals as to where the broader market is heading.

And the news from the Peak today?

Until this year the four trophy properties redeveloped from Skyhigh kept their titles as Hong Kong’s most expensive homes. One of the mansions was sold in 2011 to an undisclosed buyer for HK$800 million in a sale that translated into HK$130,000 per square foot. The Hong Kong Economic Journal (HKEJ) reckoned this made it “the world’s most expensive residence”, ahead of the penthouse at Monaco’s La Belle Epoque.

The title is, of course, disputable. Homebuyers outside Hong Kong don’t tend to measure property values in per-square-foot terms. And the most prestigious properties don’t normally change hands. Buckingham Palace was valued by TIME magazine at $1.55 billion last year and ranked as the world’s most expensive house. But obviously, Her Majesty’s home is not up for sale.

That doesn’t stop Hong Kong newspapers continuing to use the “world’s most expensive home” label and in August it was reported that another luxury home on the Peak had broken records by going for HK$1.5 billion, or HK$150,000 per square foot.

The seller, Francis Yuen, is one of the most astute financiers in Hong Kong. But it was the buyer that interested most: Jack Ma, the founder of internet giant Alibaba, reports HKEJ. That seemed to be a sign that mainland money is still active in some of Hong Kong’s most desirable residential areas. It offered further evidence of the Peak’s evolution from a place that began as a home for Britons of colonial privilege, then after 1997 became more associated with Hong Kong’s wealthiest local families, but now houses a newer breed of mainland Chinese billionaire.

Anyone wanting to become a neighbour of China’s richest man (as per Bloomberg rankings) will have to be perhaps wealthier. A house nearby which has been on the market for more than a year is looking for someone willing to part with HK$819 million, or HK$175,000 per square foot.

Transactions for luxury homes have traditionally provided a leading indicator for Hong Kong’s broader property market. But since 2012 the Hong Kong government has slapped hefty taxes on trophy purchases. Buyers have to pay much higher stamp duties on premium homes (i.e. those valued at HK$20 million or higher), and even more if they are not permanent residents of the city. But the levies haven’t stopped Chinese tycoons from snapping up some of Hong Kong’s best properties, like the iconic Ho Tung Garden (the former mansion of Sir Robert Hotung, a comprador for Jardine Matheson). It changed hands in January this year for HK$5.1 billion. It remains the biggest ever deal for a single residential property in Hong Kong and the buyer – a businessman from Sichuan – was compelled by the taxman to cough up an additional HK$1.2 billion in various stamp duties (again, the most ever paid in a single residential deal).

How’s the broader market faring?

After hitting dizzying levels in 1997, Hong Kong’s property sector suffered a six-year deflationary cycle, with prices falling more than 70% along the way. The market bottomed out in 2003, as more Chinese money began to flow across the border. Since then home prices have been on a 12-year boom (albeit experiencing a brief hiccup at the height of the 2008 global credit crisis).

The Centa-City Leading Index, a tracker compiled by the territory’s biggest real estate agent Centaline since 1994, shows that home prices in Hong Kong have climbed by a factor of four since 2003, and more than doubled since early 2009.

This extended bull run has scuppered many of the barometers used to measure the health of the sector.

“Unrealistic transaction prices usually point to a very toppish market, conventional wisdom has suggested. But property prices in our city simply get crazier,” the Hong Kong Economic Journal complains. The newspaper reminds us that in 2005, when a penthouse apartment in West Kowloon was sold for HK$160 million (or HK$32,000 per square foot), real estate analysts had already been warning that “a property bubble is forming”.

But with a fast train linking the area to the airport, and new supply limited to five more upmarket residential blocks, West Kowloon has proven a favourite place for property investors from mainland China. Another penthouse unit in the same district changed hands at HK$530 million, or HK$86,300 per square foot, last year.

Mainland money has made it harder to read the market by distorting many of the traditional indicators. “It was much easier to call the top before the property bubble popped in 1997, when both panic buying and leveraged speculators abounded,” a columnist admits in Ming Pao, another Hong Kong newspaper. “But in the last few years some mainland investors don’t even blink an eye when paying for properties here entirely in cash.”

Demand from mainland China for premium property has put pressure on affordability across the wider market. Government data suggests that by the end of March this year the cost of an average housing unit (according to Hong Kong standards this means a gross floor area of 500 square feet) equated to 15.5 times the median family income. “All the members of an average family would need to stop eating and drinking for more than 15 years [assuming their incomes don’t increase] in order to buy a small flat,” Ming Pao observes.

The affordability problem means that developers are now building ultra small flats. Li Ka-shing’s property firm, for example, began selling a number of “mosquito-sized apartments” last year. The mini flats are less than 200 square feet (“the size of a luxurious prison cell”, according to the South China Morning Post) but they still cost more than HK$2 million.

Any cracks in the market ?

Property inflation in Hong Kong has also produced some of the world’s most expensive car parking spaces (the record for a single lot now stands at HK$12 million) and even impacted the cost of dying (storage units for cremation urns can cost HK$1.5 million).

But tenants of some of the territory’s busiest retail spaces have been at the vanguard in making plain that prices have got too high. Plunging tourist arrivals from China and shrinking retail sales have forced some luxury consumer brands to give up on their commercial leases, while others have been negotiating with their landlords for better contractual terms (see WiC295).

Take Russell Street in Causeway Bay, a prime retail district. The Hong Kong Economic Times (HKET) reports that the first empty outlets for more than a decade began to appear on the street this year. Citing a recent survey by property consultant Cushman & Wakefield, HKET notes that Russell Street has just surrendered the title of “the world’s most expensive street” to New York’s Fifth Avenue. “Tenants are certainly having more bargaining power now. Landlords are more prepared to cut rents if the alternative is leaving the shops empty,” it concludes.

Interest from mainland Chinese in the residential sector seems to be slowing too. According to a market report by Centaline, mainlanders accounted for less than 8% of the property value that changed hands in the primary residential market in the second quarter (at its peak, mainland Chinese buying accounted for nearly half of the value of new homes purchased).

The proportion of mainland Chinese buying in the second quarter was even lower for secondary transactions (in the mass market), which came in at 4.1%, a historical low.

“Buying demand from mainland Chinese has been affected by the stock market crisis in the past few months,” a real estate agent told Now TV. “You can hardly find a mainland buyer in West Kowloon.”

That’s why there has been a growing chorus of bearish calls from property analysts. Bocom International, the investment banking unit of Bank of Communications, expects home prices in Hong Kong to drop as much as 20% in the last few months of 2015, while Swiss bank UBS predicted last week that home prices could tumble up to 30% from now to the end of 2017.

A bigger correction is coming?

Predicting the inevitable correction in real estate has been a thankless proposition in Hong Kong, the Apple Daily suggests. It notes that its sister publication Next Magazine has had more than 40 cover stories (out of 700) since 2001 on the property market, and that almost all of them have painted a bearish outlook. “The Hong Kong property market is highly distorted,” it explains, taking a swipe at both the Federal Reserve’s quantitative easing, as well as the impact of Chinese monetary policy, on local prices.

“You [property analysts] can do nothing, as it can be really irrational,” it complains of the market.

But if Norman Chan, the chief executive of the Hong Kong Monetary Authority, is to be believed, these distortions could soon be coming to an end. “The overheating property market over the past few years has been due to three conditions – insufficient supply, a low interest rate environment globally, as well as mainlanders buying local property,” he said. “Now all of these three factors have changed, and the weakening of the A-share market could lead to uncertainties in the Hong Kong property market.”

In fact government officials like Chan have long been warning that US interest rates won’t stay low forever. Hong Kong’s currency is pegged to the US dollar, which means that the local Hong Kong dollar has been strengthening on hopes of a rate hike in Washington, even as most of its regional counterparts have been weakening. August’s devaluation of the renminbi has already rendered Hong Kong’s property more expensive for mainland buyers.

There’s also another concern more specific to the local market: what happens after 2047, when the city’s mini constitution, the Basic Law, expires (see WiC287)? For the property sector, the issue is expected to get more attention as we approach 2017, as many residential mortgages in Hong Kong carry 30-year terms.

At the very least, few Hongkongers still see significant upside in the territory’s property market. Shih Wing-ching, the founder of Centaline, told reporters last month he expects home prices to hover at current levels this year.

And though buyers may be fatigued, property owners are under little financial pressure to take lower bids, since leverage ratios in the sector are some of the world’s lowest. This mismatch between buyers and sellers could lead to big discrepancies between bids and offers. The upshot: transaction volumes could fall to low levels, rendering the market unusually illiquid.

Only on occasions where owners are forced to sell will market clearing prices emerge. As WiC has previously reported, there was one high-profile case recently in which the asking price for a penthouse in a prime building close to Hong Kong’s business district was dropped from $65 million to $45 million after it attracted no interest for a three-month period.

Meanwhile Centaline’s Shih has also admitted that revenues at his real estate agency have dropped 30% from busier periods. That’s not just down to Hong Kong, though. Centaline operates in 37 Chinese cities, with more than 2,400 branches. The agency has remained private since its foundation in 1978, but Shih says it will IPO in Hong Kong, likely next year.


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