The View

Hong Kong's worship of property investment has created a society of excess

The city is a place where success and wealth are not measured by what is created but by connections and property assets

PUBLISHED : Sunday, 11 October, 2015, 11:07pm
UPDATED : Sunday, 11 October, 2015, 11:36pm

Hong Kong has become a society where innovation and entrepreneurship have become irrelevant. What counts in this town when it comes to success and wealth isn't what you create, but to whom you are married or related.

Facing up to the reasons a city once known for its dynamic business environment has been overtaken by mainland Chinese cities like Shenzhen is important to finding policy solutions.

Perusing Hong Kong Tatler and other high-society magazines quickly reveals the extent of the isolation of the wealthy. Almost every photo description reads: "son/daughter/niece/nephew of" some rich person. People are usually described as being related to someone "powerful".

Talking to private bankers around Hong Kong shows the highly concentrated and unhealthy state of high ultra-high-net-worth portfolios. They describe a preponderance of wealthy individuals and families in Hong Kong that have either directly made money from real estate or, if their main business isn't real estate, have private investments that feature a lot of local property.

Indeed, private bankers admit that since the end of the severe acute respiratory syndrome outbreak in 2003, Hong Kong's real estate bull market has enriched property investors to the point that it is impossible to preach and practice long-term portfolio diversification.

It is almost heretical to discuss significant diversification into international equities with any of their clients.

Even clients who make their money in real estate development plough their personal wealth back into local or international real estate, buying flats or commercial properties for lease. The result is not only an overconcentration in Hong Kong properties, but unhealthy demand and upward pressure on real estate prices as investors are willing to buy more at any prevailing price.

It's an unhealthy and unbalanced situation, which explains why there is plenty of investment capital available in Hong Kong, but not for technology start-ups or any new ideas. Almost all of it is directed and redirected into real estate.

Data from Asian Venture Capital Journal showed that in 2014, Hong Kong start-ups attracted a total of US$33 million in funding from international and domestic investors. While that was almost double the amount in 2012, Singapore start-ups attracted US$319.4 million. Almost two-thirds of startups admitted that insufficient capital was the biggest obstacle facing them in Hong Kong. And 88 per cent said they were self-funded in a city that was supposed to be overflowing with investment capital.

It's unlikely that Hong Kong's rich will accept Warren Buffett's succession advice: passing on tremendous wealth to your kids places a curse and loathsome burden upon them. But, hoarding wealth in amounts far beyond what a future generation needs prevents capital from being productively put to work in society or the economy.

If you look at Forbes' annual list of the 400 richest people in America, there is a discernable trend from its start in 1982 to today. In the 1980s, oil and gas and real estate were the main sources of wealth. By the 1990s, technology took over. Unfortunately, Hong Kong has been stuck on property for decades and it is unlikely to change.

Hong Kong needs a progressive inheritance tax system to break up its logjam of wealth. While it won't create equality, it could be used as a policy tool to compel more philanthropy and investment in entrepreneurship. Tax credits in designated areas like technology could be used to offset inheritance taxes.

One of the arguments against an inheritance tax is that the really rich don't pay the tax because they move their money away. But Hong Kong's wealth is mainly tied to real estate, which cannot be moved. Taking away money from rich people won't bring property prices down or suddenly eradicate income disparity. People are not equal and cannot be made so.

However, the creation of a caste of multigenerational wealthy families is already creating social and political problems for Hong Kong. This isn't because members of such families become necessarily malevolent or feckless people over the generations, but simply because the growth of such a caste creates an enduring concentration of economic and social power beyond the reach of the bulk of society.

The life experiences, interests and capacity to wield the levers of power held by members of such a caste become extraordinarily different from those of even the moderately well to do. This distorts political and economic decision making and ultimately erodes the vibrancy of our society.