Tuesday, September 30, 2008

HK Luxury Housing Market Unruffled By Economic Turmoil

Source : The Business Times, September 26, 2008

SO far this year the financial turmoil elsewhere has had surprisingly little effect on the luxury residential housing markets in Hong Kong and Singapore.

Following the demise of Lehman Brothers, the takeover of Merrill Lynch, and the strong possibility of future consolidation in the financial sector, it is difficult to gauge the number of European and American expats who are likely to continue to be posted to Hong Kong and Singapore. However, banks and other major multinational corporations are looking at the higher levels of growth in Asia to support future revenues, given the slowdown in the United States and European Union.

That should provide some support for demand for high-end property in Hong Kong and Singapore, as leading locations for multi national headquarters for a range of industries.

Wealthy Asian expats are continuing to invest, where they are cash rich and less dependent on debt financing. China's new rich are buying in Hong Kong.

The discussions in the press about a downturn in the housing markets, particularly in Hong Kong, so far this year have not been seen at the luxury high end of the residential market.

Megan Walters, Asia economist for Cushman and Wakefield, commented: 'It is too soon to tell what effect the Wall Street crisis will have on the luxury residential market in Hong Kong, but people always want prime property. It is always in demand reflecting the lower risk and lower yields than that on secondary property, and invariably luxury and prime property occupy the same area of the market.'

Buying luxury residential property in leading cities can be an excellent investment, but the returns are a complicated three-way play between the point in the property cycle, long-term growth prospects and foreign currency exchange movements, as well as the particular characteristics of what may turn out to be a hot new location in a city.

The cost of buying a 120 sq m apartment in Hong Kong is comparable with buying one in London, New York or Tokyo. An apartment in a decent neighbourhood is in the order of US$1.2-1.9 million or about US$ 4,000 to US$6,000 per metre per month to rent.

Luxury property in Hong Kong can reach five times those figures, and with the level of wealth distribution much more unequal than in the US, UK and Japan, there are sufficient numbers of wealthy purchasers to support the prices. The Gini co-efficient is a measure of wealth distribution, where 0 is total equality and 100 is total inequality with very rich and very poor. Hong Kong has a higher Gini co-efficient than Japan, the UK and USA.

In terms of where is the best long-term bet to buy a property, at the luxury end of the market, it is interesting to look at the GDP per capita figures for Hong Kong compared to those for the USA, UK and Japan.

There are no restrictions on foreigners buying in Hong Kong.

Investment yields in Hong Kong are comparable at around 4 per cent for prime 120 sq m apartment in a good neighbourhood, about the same as New York, London and Tokyo.

Foreign investors can occasionally see buying overseas property as more risky due to a lack of familiarity with local rules. For those looking to buy in Hong Kong, the country's position in the World Bank Ease of Doing Business ranking shows it to rate higher than Japan and the UK demonstrating no great risk to investments. From the property cycle perspective, luxury apartments at this level exhibit similar risk characteristics compared to other international cities and consequently exhibit similar returns.

In Hong Kong, the traditional high end luxury area of the Peak is being superseded by the new Kowloon side location. Fifteen years ago it would have been unthinkable that investment bankers would want to live anywhere other than on Hong Kong Island. Now, West Kowloon is home to fund managers and their spouses, with all the restaurants, shopping and gyms that are a prerequisite for some to lead a luxurious life style. The new Kowloon Station where the ICC is being developed is now home to prime office, retail, residential and hotel properties and prices are at historical highs.

Traditional high-end areas are Mid-Levels, Southside of HK Island and The Peak. The Peak is the traditional area for high net worth purchasers. Severn 8, a luxury town house development, concluded a transaction at HK$56,000 (S$10,220) psf in June, and developer Sun Hung Kai Properties also achieved a record price for an apartment when they sold a penthouse unit in their Arch development above Kowloon Station for HK$41,100 psf. This now holds the record price for an apartment surpassing Mid-Levels.

For those that want houses, developers are also focusing on building villa properties in the New Territories close to the border with Guangdong Province. Wealthy factory owners in the Shenzhen SEZ prefer to live close to the border and high quality properties are between HK$5,000-9,000 per sq ft.

Gary Knowles, head of residential services at Cushman and Wakefield's Hong Kong office, suggested that 'the expat community in Hong Kong has grown on the back of the financial sector. Due to the rapid increase in office rents, many banks have moved their back office to less expensive locations and the relocation of the airport to Chek Lap Kok has led to an increase in popular residential locations away from the more traditional areas of HK Island and Sai Kung'.

Other infrastructure developments are also affecting popular locations, with the Bridge Link to Macau and Zhuhai new rail links between the New Territories and HK Island as well as the redevelopment of the old Kai Tak Airport. The new Airport Express link has seen a plentiful supply of new residential properties built on the West Kowloon reclamation above the Airport Express stations.

Land sale auctions in Hong Kong have been limited and the majority of new residential developments are being generated by Urban Renewal Authority redeveloping older areas of HK and Kowloon.

Upcoming luxury developments are The Cullinan above Kowloon Station (which will be HK's tallest glass wall residential building) and the latest phase of Residence Bel-Air in Pokfulam on the Island.

The writer is managing director, Cushman & Wakefield Singapore

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