Hong Kong is one of the most expensive places in the world, especially when it comes to its real estate. Despite property markets falling around the world, some people estimate that Hong Kong’s homes and office buildings are overvalued by 50%, based on rental yields. It was recently reported that a five-bedroom flat sold in October 2009 for $57m, or a tidy $855 per square metre. Last year, house prices in Hong Kong’s top-tier Peak district were up by about 40% and the area now ranks as the third most expensive city in the world, behind only Monaco and London.
However, any signs of a market that had peaked did not affect the 2009 Mipim Asia real estate conference, which had more attendees than the previous year, with a distinct buzz around Hong Kong’s various stands. So if the market is widely agreed to be overpriced, where are property investors putting their money? Are there still opportunities for good returns in such an expensive area?
Cornerstones of growth
Some of the biggest drivers of the growth of Hong Kong’s economy and real estate market look unlikely to change. According to asset managers, many of Hong Kong and mainland China’s investors like to keep their portfolios simple. This means that when they invest, they will put their money in stocks on the Hang Seng Index, usually with well-known and established companies, such as HSBC, or by purchasing a piece of property. Asset managers claim that this has resulted in an interesting relationship between the index and house prices, whereby if the Hang Seng gets too high and looks overpriced, people will turn to property for their investments. The inverse is true, should property prices look even more expensive than usual.
There is also Hong Kong’s demographic problem. The population of the Special Administrative Region far outnumbers the available supply of property, meaning there is always demand for more units. An estimated 7 million people inhabit an area that is just over 1036 square kilometres in size and this population has been growing steadily for decades.
As resilient prices continue to march upwards, authorities are scrambling to do something about what everyone fears is quickly becoming a housing bubble. The government recently ordered banks to raise the level of cash required from homebuyers, and mortgage rates have been gradually eased upwards. While some managers worry that this could slow growth, several of them admire what they call the ‘maturity’ of the Chinese financial ministry. They see it as a prudent move to avoid economic and asset-price overheating. They are also consoled by the widespread belief that this housing boom is being financed by savings, as opposed to the debt-fuelled boom of the UK and US property markets.
However, Bryan Southergill, JPMorgan’s head of Asian real estate, is frank about the uncertainties surrounding the Hong Kong market. He readily admits that he is unsure of what will happen in the coming year, but overall he cannot help but like the economic fundamentals of both Hong Kong and mainland China. This, he believes, could soften a potential decline in prices. “There has been great support from the Chinese government in the form of the fiscal stimulus. There is plenty of money sloshing around, but a lot will depend on what happens with the Hang Seng,” he says.
There is plenty of reason to feel confident. The government has poured money into China’s banks and infrastructure. Even better is the convenient truth that the country still has more than $2000bn in foreign exchange reserves. As for the Hang Seng, it has remained relatively stable. In the past six months it has gained more than 1% and the numbers are even better for the past 12 months, at 6%.
Mr Southergill’s statements can also be backed up by the fact that some of Europe’s largest institutional investors are looking at Hong Kong property as well as that of the south-east Asia region. APG, the asset management arm of the E205bn Dutch pension scheme ABP, is expanding its operations at its recently formed Hong Kong office. To date, the office has invested E2.5bn in Hong Kong and Asian real estate.
Daan Van Aert, the group’s director and head of strategic real estate for Asia, confirmed that the office would soon have a new president for its Asian investments and will recruit new staff for investments across the spectrum.
Commenting on the Hong Kong real estate market, he reiterated many of Mr Southergill’s convictions. He is cautious about property prices in the short term, but he likes the fundamentals. “The Hong Kong market is of course a market in itself. It is an area where we think valuations are a bit ahead of fundamentals. It seems a bit stretched and we look at our investment opportunities there from that angle. We are continuously looking for where we can get the most attractive transactions,” he says.
“I am not seeing any opportunities in the private market that beat other opportunities in the region. This could change, for example, if the Chinese stimulus package alters and/or interest rates in Hong Kong rise. In the listed securities market, however, there are some opportunities due to attractive pricing of a number of companies that primarily focus on the office and retail market. But if I were to allocate money in the private real estate market in Hong Kong, it would be in the HK$5m ($644,000) per unit and less residential market,” he adds.
Making money in the most expensive real estate markets is never easy and asset price bubbles seem to loom ominously around every corner. However, compared with some of the other top-end real estate destinations in the world, there are some fundamental factors that should continue to drive Hong Kong’s property market. While in the short term, investor fear may result in a period of stagnation, many asset managers appear to be waiting for a lull in prices as the best opportunity to get into what could be a highly lucrative market.