Property, Talking Point

Changing of the guard

The end of an era for Hong Kong and its longstanding property bosses?


Cheng Yu-tung (who died last week aged 91)

Alice Poon spent nearly two decades in Hong Kong’s real estate industry, including a long spell as personal assistant to the founder of its biggest developer, Sun Hung Kai Properties (SHKP).

That made her something of an insider and in 2005, after she had retired, she wrote Land and the Ruling Class in Hong Kong.

The book, which was translated into Chinese and published in Hong Kong five years later, discusses how the territory’s land and planning policies have led to an acute concentration of economic power in the hands of a few families.

Poon writes that although Hong Kong is regularly named as one of the world’s most open economies, competition across much of the local market has been stifled by a handful of wealthy individuals and firms.

Indeed, when The Economist compiled its first crony capitalism index in 2014, Hong Kong stood out. Its local billionaires had fortunes equivalent to about 80% of the territory’s GDP (Russia’s tycoons were second, with 20% of their national total).

As mainland Chinese businesses increase their commercial presence in Hong Kong – particularly in the all-important property sector – this gilded group is coming under new pressure. Times are changing in the territory, and one of the earliest to react was its richest man, Li Ka-shing, who has been shifting much of his direct exposure from Greater China towards Europe (see WiC268).

Another sign of the new mood came in a landmark case in December 2014, when SHKP’s chairman was convicted of corrupting a senior government official (see WiC242).

And last week there was another symbolic moment, when a leading property tycoon passed away. The death of the 91 year-old Cheng Yu-tung was hardly a shock. But as the local media noted, it was more evidence of “the closing of a Hong Kong era”.

Cheng was, after all, one of a small group of business titans who had shaped Hong Kong’s development for almost half a century.

What was Cheng Yu-tung’s business background?

Cheng was born in Shunde in Guangdong province in 1925. Like many of the Hong Kong tycoons of his generation, he fled the mainland to escape war, reaching Macau, then controlled by the Portuguese, in 1940.

In Macau Cheng started as an apprentice with a family-owned gold retailer known as Chow Tai Fook. Folklore has it that he was noticed for taking his job more seriously than his peers, including a devotion to cleaning the family’s spittoons. His work ethic earned him the respect of the owner and Cheng married the owner’s daughter, taking over what was then a reasonably modest family business.

Under his leadership Chow Tai Fook soon expanded into Hong Kong, becoming one of the first gold stores to sell diamonds, after Cheng took control of De Beers dealerships in the city.

Selling gold and diamond jewellery was a platform for Cheng to expand into other areas, and he began investing large sums in Hong Kong’s property market in the late 1960s.

His property firm New World Development went public in 1970 and has since become a diversified conglomerate with operations in hotels, telecommunications, energy, casinos and stock broking.

Cheng’s property empire even brought him into contact with Donald Trump in a partnership for a project in Manhattan that eventually turned sour. “For the Chengs, Donald Trump was not a rival but merely a target of opportunity,” the New York Times reflected in 1994, noting too that “people familiar with the Chengs’ operations agree that they, not Mr Trump, will call the shots.”

Cheng suffered a stroke four years ago, lapsing into a coma (from which he never awoke). His fortune was pegged at $17 billion in Forbes’ most recent estimates, ranking him as Hong Kong’s third richest man behind Li Ka-shing and Lee Shau-kee, the founder of Henderson Land, another property conglomerate.

How did property tycoons like Cheng get so influential in Hong Kong?

The changing of the guard among Hong Kong’s plutocrats is inevitable because many of them are so old. Li Ka-shing and Lee Shau-kee are both 88; the gambling magnate Stanley Ho is 94; and Lui Che Woo, another property king who heads the Galaxy casino group, is 87.

Most of these men came from Guangdong province and their relationships across the border in China have been a critical factor in their success in Hong Kong.

As such, they stand out from the older trading firms in the city, especially the British hongs, which dominated colonial Hong Kong for a century and a half. But after Britain agreed to hand the city back to China their grip was loosened and a changing of the guard took place as the local tycoons influence rose.

In 1987, in a sign of the times, Cheng, Li and Lee combined in a hostile takeover attempt for Hongkong Land, then the city’s biggest property firm by market value, and controlled by Jardine Matheson, the longstanding British trading house whose history was so intertwined with that of Hong Kong itself. The bid was rebuffed, but only after the tycoons had taken a tidy profit on their shares in the target. In fact, Cheng and the other property bosses had been strengthening their positions in Hong Kong since the 1970s.

It was in this decade that they began to come to prominence. It was a time in which order had to be be restored following riots by pro-Communist activists inspired by the Cultural Revolution across the border. Critically, one of the colonial government’s main responses to the unrest was a construction campaign, leading to the rapid development of new towns in the New Territories. Cheng, Li and Lee all participated in the programme, with a joint venture to develop Shatin (literally: “sandy field”) as one of the first new towns.

All the land leases in these more rural parts of Hong Kong were set to expire in 1997, however, when the British government was due to return the New Territories to China. That forced Hong Kong’s government to contemplate the territory’s future, and the ascent of the likes of Cheng and Li began to take on an inevitable air, Poon writes in her book.

Unlike the British hongs Jardines and Swire, the magnates had fostered relationships with both sides. And later, when business sentiment was taking a battering in the lead-up to the 1984 Joint Declaration (in which Britain formally announced that it would relinquish control of Hong Kong), they stepped in to restore confidence.

Cheng was bold enough, for instance, to sign a contract that year to spend HK$1.8 billion building the Hong Kong Convention and Exhibition Centre. In 1997 it was the venue for the handover ceremony itself. Meanwhile in these more uncertain times it was the local tycoons who were willing to invest in other property and infrastructure projects, and in doing so boosted stability.

Keeping it in the family

Cheng briefly retired in 1989 and handed control to his eldest son Henry. Two years of ambitious but ill-timed investment led to a debt crisis, and Cheng Senior was returned to restore investor confidence.

He stepped down as New World’s chairman for good in February 2012 (shortly before he suffered a stroke) and the succession plan this time was made more concrete. His grandson Adrian Cheng, a Harvard graduate, had already been made executive director, and his granddaughter Sonia was promoted to oversee the group’s hotel and project management divisions.

“Cheng’s plan was intended to avoid a repeat of the feuds engulfing other family empires, such as the battles between the three Kwok brothers of Sun Hung Kai Properties and the wrangling among the [Stanley] Ho clan,” was the verdict of the South China Morning Post.

The family feud at SHKP burst into the public domain in 2008 when Walter Kwok sought a court injunction to stop his younger brothers removing him as chairman, while the tussle for Stanley Ho’s wealth took on soap-opera dimensions with disputes between the children of his four wives.

The row prompted Ho, who had also suffered a stroke, to make a public statement condemning share transfers at his companies.

“Atop many of Hong Kong’s largest companies are aging entrepreneurs who began making fortunes in the 1950s and 1960s, at the height of the postwar boom. Now that these magnates are in their twilight years, the question of their succession is coming to light, and often being settled with ugly court battles,” Wall Street Journal noted.

In fact, feuding inside the richest families has got more common since 2010, when death duties were abolished, making rival claimants more willing to go into battle in the courts.

As an effort to make his own succession more transparent, Li Ka-shing made his inheritance plan public in 2012. His older son Victor will take over his listed companies (worth about $109 billion, according to Apple Daily), while Li will employ his personal capital to help his younger son Richard develop his own businesses, which he said should be worth more or less the same as Victor’s cut.

How has Hong Kong’s ruling class got along with Beijing?

Most of the property tycoons mentioned in this article have been awarded Grand Bauhinia medals (the highest honour that the Hong Kong government can bestow) for their services to the territory. However, there have been signs that the Chinese leadership hasn’t been quite so happy with the status quo in Hong Kong more recently, where discontent has been growing over income inequality and stratospheric home prices.

Li Ka-shing was always said to have some of the closest connections to China’s political elite (symbolised by former leader Jiang Zemin’s decision to stay in one of his hotels during visits to the city). But last year China’s state media forgot these former friendships as it fired off a series of editorial broadsides accusing the businessman of divesting too many of his investments in China (see WiC297).

Indeed, one of the themes in Hong Kong’s more recent political debates is “the battle between Gongchandang [the Communist Party] and Dichandang [the real estate party]” in the city.

This notion of a growing divide between the property tycoons and China’s political elite picked up pace in March 2012 when Henry Tang, a candidate favoured by most of the property bosses, lost out to Leung Chun-ying in elections to become the territory’s Chief Executive. Leung was widely seen as Beijing’s man, and there was intense speculation that he was even a Communist Party member (Leung has repeatedly denied it).

Newcomers to the feast

Another challenge for the Hong Kong tycoons is coming from property firms across the border. In the financial year ending in March, 10 developers from mainland China spent more than HK$42 billion on land acquisitions, representing about a quarter of the supply of new housing stock being made available in the period, the Hong Kong Economic Times reported.

Consider that in the year ended March 2012, mainland developers accounted for just 1% of the successful bids for land in Hong Kong.

“Chinese developers will introduce more intense competition into Hong Kong and compress the profit margins of the local property industry,” the Hong Kong Economic Times suggested.

Mainland firms have also been active in Hong Kong’s commercial property sector, including a deal late last year in which Evergrande acquired a premium office building from Chinese Estates (a Hong Kong developer controlled by Joseph Lau, a long-time business partner of Cheng) for HK$12.5 billion.

The deal rewrote the record books as the most expensive building ever purchased in Hong Kong. That title might not last long, though, after speculation that ICBC, China’s biggest bank by market value, is in talks to acquire another commercial building for HK$35 billion from Li Ka-shing.

(That sale will lessen Li’s Hong Kong exposure, but given the potential buyer it might also be part of a strategy to repair his relations across the border after the criticisms he received in state media last year. For example, there was news this week that he spent nearly HK$10 billion to acquire 10% of Postal Savings Bank’s H-shares, which went public in Hong Kong last month. In the past he has participated as a cornerstone investor in other IPOs by Chinese state-backed firms; his seal of approval an important factor for the city’s retail investors to follow suit and subscribe to the offering.)

Time for a change?

Generational change is coming in the property sector, because of the advancing years of many of its biggest names. Some of the headline-grabbing sales to mainland buyers may also be signs that they think the market has peaked. After all, these billionaire businessmen – most especially Li – have a reputation for timing the market to perfection.

An alternative theory is that Hong Kong is heading for a period of deeper-rooted change, akin to the era in which those very same tycoons challenged the British hongs in the 1970s and 1980s and grabbed a bigger share of the all-important property market.

The context here is the darker mood in the territory, especially among younger people, who despair that they will ever be able to afford a local home. This sentiment is said to have contributed to the Occupy Central movement two years ago, and riots in the city earlier this year (see WiC314). It also fuelled the vote for the younger generation of candidates that won seats at the city’s legislative council elections in September.

The 25 year-old legislator-elect Yau Wai-ching is one of the new breed and she caused a stir this week with her candid remarks about the housing problems. “We [young people] cannot afford the rent of an apartment. We don’t even have enough room to have sex,” she told a forum. Yau is a member of a new political grouping that advocates self-determination for Hong Kong – an impossibility for China’s leadership, which is infuriated whenever its sovereignty is challenged. All the same, China’s leaders won’t want the mood to worsen among younger people, and some commentators are speculating that the push by the mainland developers into the local market is part of a plan to jack up housing supply and quell some of the discontent by making housing more affordable.

If so, that offers a few parallels to the 1970s and the housebuilding drive that helped many of Hong Kong’s property bosses establish themselves.

Of course, it would also be an acknowledgement that the more recent strategy – of giving the local tycoons effective stewardship over the real estate market since 1997– has run its course.

Through this process the property tycoons have got fabulously wealthy, but the powerbrokers in Beijing are increasingly aware of the political costs that have resulted – i.e. a more fractious city.

“As one power descends another ascends,” Peter Guy, a banker-turned-columnist, opined in the South China Morning Post last week. With Cheng’s death, he suggested, “the winter of the old tycoons” had arrived.

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