COLUMN ONE : Hong Kong Real Estate Gets Unreal : Even a parking space can cost $125,000 in the colony’s crazy housing market. Local buyers are being squeezed out, foreigners must relocate and everyone fears the bubble soon may burst.
When banker Doug Lawson moved his family here recently from Singapore, he learned the hard way what real estate agents are fond of calling “shock therapy, Hong Kong-style.”
The first jolt came when he finally found an apartment big enough to house his wife, Laura, and four children. The apartment, on the 30th floor of a high-rise in trendy Tai Tam on Hong Kong Island, was less than half the size of his former townhouse in Singapore.
The rent: a lofty $9,000 a month.
The second shock came the next day when he sent in a check to secure the lease. The landlord claimed to have other tenants ready to move in and bumped the rent up to a budget-busting $11,000 a month.
“We didn’t have a choice,” Lawson recalled. “I had to sign before they raised it any more. It’s just crazy out there.”
Move over, Tokyo. In the unreal world of Hong Kong real estate, prices for everything from offices to parking spaces are now among the world’s highest. Monthly apartment rentals in five figures are not uncommon, while lucky owners of apartments have seen their small down payments blossom into multimillion-dollar fortunes.
At one benchmark complex, the Royal Cliff, in an area favored by Americans on the south side of Hong Kong, apartments go for $25,000 a month. A house on Victoria Peak, Hong Kong’s swankiest address, recently sold for a record $35 million to a buyer who wants to put a housing development in the home’s back garden.
“My agents always keep a box of tissues in the car,” said Jan McNally, associate director for residential property at broker Richard Ellis, which caters to American and British executives. “The wives always cry on the first day out looking at what’s available.”
Underlying the high prices is tremendous demand from foreign businessmen flooding into the colony hoping to cash in on the boom next door in China, combined with an extreme shortage of land in crowded Hong Kong, one of the most densely populated areas in the world.
In addition, because Hong Kong’s currency is tied directly to the U.S. dollar, low interest rates and high inflation have made real estate a much more attractive investment than parking spare cash in a bank.
But the dizzying prices have raised a number of pressing concerns about Hong Kong’s future. Some multinational companies are beginning to relocate administrative staff to less costly locations in China or Singapore.
Many local couples entering the housing market for the first time can no longer afford to either buy or rent an apartment.
But most worrisome of all is the possibility of a collapse in property prices of the magnitude experienced in Los Angeles and Tokyo in recent years.
By some estimates, property accounts for more than 60% of the Hong Kong stock market and a sudden downturn could have a major impact on the economy of the territory, and in adjoining Chinese provinces. Many see a real estate crunch as a greater threat to Hong Kong’s future than its scheduled hand-over to Chinese rule in 1997.
Sensing that the market was severely overheating, Hong Kong’s British rulers took steps in June to deflate the property market gently. Prices have already come down more than 10% and many speculators have moved to the sidelines, at least for now.
On the other hand, almost half of Hong Kong’s 6 million residents are insulated from the immediate effects of the high costs because they live in public housing developments where the rent is as little as $135 a month. There were cries of outrage recently when the government reported that nearly one-sixth of the families in public housing also owned private apartments for speculative purposes, even though the apartments are reserved for low-income families.
At one point, real estate was in such demand that members of Triad gangs, wearing the signature white gloves of Hong Kong’s underworld hoodlums, tried to gain control of the huge lines of prospective buyers trying to get into new real estate deals. The government responded by adopting strict laws requiring property owners to sell new developments by lottery under the supervision of an accounting firm.
“We’re gradually letting the air out of the balloon,” said Fanny Law, deputy secretary for planning, environment and lands. “There was too much speculation in the market, and prices pushed up too rapidly, driving out the genuine homeowners.”
Nonetheless, skeptics like Swiss fund manager Marc Faber, a renowned pessimist about Hong Kong real estate, believe the market is heading for a selloff of major proportions. “In real terms, I doubt if property prices will ever rise this high again. Forever.”
Although Faber’s view is still not widely shared, Hong Kong banks have sharply curtailed their lending to avoid the kind of crisis that buffeted the U.S. savings and loan industry in the late 1980s. At least two major banks have stopped providing mortgages because they have reached their government-imposed ceiling of 40% of assets in real estate loans. At other major banks, getting a mortgage has become much harder.
Michael Broadbent, a spokesman for the Hongkong and Shanghai Banking Corp., the territory’s largest bank, said buyers now need to put up 50% of the purchase price in cash for apartments costing more than $675,000, up from the 10% demanded last year. Less expensive apartments require a 30% down payment.
“We don’t see a collapse,” Broadbent said. “Fundamentally, demand is there. Hong Kong is still very strong.”
According to First Pacific Davies, a real estate firm that closely tracks the market, residential rental prices have surged 53% in the last year, while apartment sale prices have soared an average of 38% and office rents have risen 47.3%. Those increases have affected everyone in Hong Kong, from those in $20,000-a-month luxury apartments in prime districts to $1,000-a-month tenements in the back streets of poor neighborhoods.
As in Los Angeles in the 1980s, real estate has become a Hong Kong obsession, a recurring theme of cocktail parties and dinner conversations. Those who have made a killing can’t resist exulting, while those who stayed out of the market forever lament their misfortune.
“One of the most boring things about Hong Kong is people must talk about how much money they make, and especially how much money they have made in real estate,” said Stuart Wolfendale, a popular columnist for the Eastern Express newspaper.
He noted that high-priced real estate is driving out many artisans and writers who can no longer afford the rents.
In fact, prices of apartments are so high that small-time speculators have developed a niche market for parking spaces. A spot in a good location costs more than $125,000, car not included.
“Imagine paying more for a parking space in Hong Kong than for a house in Australia!” said Isabel B. Michie, residential director at First Pacific Davies. “While housing prices in Britain have increased by three times in the last 10 years, in Hong Kong housing prices have increased six times.”
Office space is even more precious than apartments; offices in Exchange Square, the Hong Kong equivalent of Wall Street, rent for $14 a square foot per month, one of the world’s steepest rates.
One sign of the burgeoning value of office space: Seven major hotels have been pulled down in recent months to make way for office towers, despite a hotel occupancy rate of 85% in the territory. Even the landmark Hong Kong Hilton, which just completed a $12-million renovation, announced that it was closing its doors in January. At current prices, each of the Hilton’s 750 rooms is estimated to be worth more than $1 million.
The engine driving the property boom at the top end of the market is a surge in foreign business people setting up shop in the territory as a base camp for doing business in China’s booming economy.
Official immigration figures show the number of Americans in Hong Kong has gone from 19,300 in 1990 to 29,500 in May, 1994. Equally dramatic increases have been registered for Japanese, British, Australian and Canadian business people.
Gerald L. Murdock, chairman of the American Chamber of Commerce, noted that the high rents have failed, so far, to deter many companies from setting up operations here. “If China is your No. 1 priority, Hong Kong is on its doorstep,” Murdock said. “There’s nobody even close for doing business in Asia.”
Many American companies are keeping their U.S. executives in Hong Kong rather than China because prices are almost as high in Beijing and Shanghai, and most Chinese cities lack basic amenities such as schools with a curriculum for foreign students.
The market appears to have been driven by U.S. financial institutions, which have poured personnel into Hong Kong in the last two years to take advantage of the region’s economic boom. The investment bank of Salomon Brothers, for example, had only 60 employees in Hong Kong 18 months ago, but now has 250, mostly expatriates. “We’ve seen doubling rents in that time,” said Jim Ward, head of human resources at the investment house. “We’re trying to hold the line.”
Companies such as Merrill Lynch, Unisys and Britain’s Standard Chartered Bank have moved a substantial number of employees to Singapore, where rents are about half as high. But most companies cite operational reasons other than the high cost of real estate for their moves.
Cathay Pacific, Hong Kong’s international air carrier, has been aggressively trying to move jobs out of the territory. Last year, it transferred some of its accounting operations to Guangzhou in China and recruited 250 people locally. It is moving its data center to Sydney, Australia, in 1995 “because of cheap land,” said Cathay Pacific spokesman C. F. Kwan.
Cathay also has offered its pilots, who are predominantly British or American, the option of living in their countries of origin. Cathay gets to keep its $7,000-a-month or so housing allowance, while the pilots commute to work from as far as Los Angeles. So far, 100 out of the airline’s 1,100 pilots have volunteered for the plan.
One intrepid Australian businessman, an insurance broker named Clive Wolstencroft, even commutes to work here from Macao, the Portuguese colony that lies across the Pearl River estuary from Hong Kong. Wolstencroft endures a three-hour daily commute by hydrofoil but says he is able to afford a house with a swimming pool at half the cost of a Hong Kong apartment.
While few executives are emulating Wolstencroft’s marathon commute, real estate agents said that all but the most affluent companies are trying some form of “downsizing,” such as setting a fixed housing allowance, which either requires executives to find smaller apartments or move into outlying districts, formerly considered socially unacceptable.
Rather than being a single territory, Hong Kong is a collection of islands off China’s southern coast, plus the Kowloon Peninsula and the New Territories beyond, all linked by ferry, tunnel or rail.
Most foreigners tend to prefer the British colonial atmosphere of Hong Kong Island to the more ethnic Chinese character of Kowloon. But even the New Territories, a 90-minute trip from the financial district, are sprouting yuppie apartment buildings where rice paddies used to bloom, with incredibly tiny, 8-by-10-foot “micro-apartments” selling for more than $20,000.
For those Hong Kong Chinese not protected by public housing, the real estate boom has turned some people into millionaires but threatens to undermine new families starting out. Newspaper cartoons poke fun at the endless battles taking place between young wives and mothers-in-law forced by economic necessity to share the same roof.
“The 116% increase in residential property prices recorded in the past three years” has outstripped the growth in what people earn, said a study by Hang Seng Bank. The result is “that home purchases have become increasingly unaffordable to most” buyers.
Housing prices also have been driven up by another unforeseen phenomenon: the return to Hong Kong of thousands of Chinese who emigrated to the United States, Canada and Australia after the crackdown on human rights in China during the Tian An Men Square demonstrations in 1989.
An estimated 20,000 Hong Kong Chinese with Canadian passports--known colloquially as “astronauts” because they leave their families behind in the West and fly back to Hong Kong on business--have returned home because they were struggling to make ends meet overseas.
Because many sold their homes in the bear market after Tian An Men, a lot of the “astronauts” can’t find an affordable house in today’s Hong Kong.
