• Thu
  • Dec 25, 2014
  • Updated: 10:05am
PUBLISHED : Friday, 19 July, 2013, 12:00am
UPDATED : Friday, 19 July, 2013, 4:11am

Numbers show how real estate firms lost the plot

The fact is prices got out of hand and the industry expanded too far and too fast


Mike Rowse has lived in Hong Kong since 1972, and is a naturalised Chinese citizen. He spent 6 years in the ICAC from 1974 – 1980, then 28 years in the Government as an Administrative Officer until retirement in December 2008. He is now the Search Director for Stanton Chase International, and also hosts a radio talk show and writes regularly for both English and Chinese media.

There is a 200-metre stretch of Robinson Road in Mid-Levels that encapsulates much of what went wrong with Hong Kong's property market.

Between Mosque Street and the traffic lights by the junction with Seymour Road, well over half of all the shop spaces are taken up by real estate agencies. Indeed, some of the companies concerned have established multiple presences along this relatively short commercial strip.

And Robinson Road is by no means unique: the same picture is repeated throughout the city.

The answer, of course, is that a lot of small shops that used to provide goods and services for nearby residents have been driven out by rocketing rents. And the only people who can afford to pay the new sums being quoted are the property agencies themselves.

This absurd situation has been brought about by our old friends "market forces". As prices of residential properties went through the roof, so commission income - maybe one per cent each from buyer and seller - climbed too.

Five agents each selling two flats a month at an average price of HK$20 million would produce a kitty of HK$2 million in a single month. Even allowing for a generous share of the commission for staff; that still puts a big chunk of change at the disposal of the real estate company.

How to maintain or even expand your share of such a lucrative market? Easy - increase visibility at street level by taking up shop spaces, and when vacancies arise, do everything in your power to stop rivals forcing their way in by renting the empty spaces yourself.

Such an arrangement was never going to be sustainable in the long term, of course, because those very same market forces would eventually catch up with the situation.

Sure enough, property prices have stalled - in part because of the government's various anti-speculation measures - and turnover has dropped sharply.

How to maintain profit levels? Not easy with volumes so low, so let go of the non-performing staff and gradually give up the leased shop spaces.

Getting rid of the staff is easy, but the premises are subject to two- or three-year leases. No wonder both agents and their employers are squealing and urging the government to drop its stamp duty increases. But there is no argument for the government to back down.

The fact is prices got out of hand and the industry expanded too far and too fast. Some companies even tried to induce hysteria in the market.

What we have now should be seen as the beginning of a healthy correction. Longer term, when the government has addressed the supply situation, the emergency measures can be relaxed without tipping people back into panic buying mode. Until then, the government should stay the course.

Mike Rowse is search director of Stanton Chase International and an adjunct professor at Chinese University



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This article is now closed to comments

What's the real good life of paying a high price in Hk for?If you have no shops, no interesting restaurants, and very soon even the golf will be gone. No car racing track that people needs to go all the way to TAi Mei Tuk with their ferrari. Just tell how boring is people. What a boring life. I think eventually the Chinese will realize that and in fact many are seeing it already. Why buying HK? Only works for people who live there and work there. If I'm international, no thanks.
San Francisco is expensive but they have wonderful shops and restaurants. And they don't even allow certain % of chain stores such as Startbucks to build there. In fact you don't see too many real estate shops there. Wonder why? They have QE too! Hk people! Wake up.no more excuses.
Hear Hear!
The Government's moves are welcomed, but it is rowing against the current. The main driver of the ridiculously high property prices is the rock-bottom interest rates caused by the Fed's QE programme, since HK is not in control of its own monetary policy.
If people have any savings what are they supposed to do with the money? They will get nothing in the bank so they do what HK people have always done and stick it in property. I lived on that same stretch of Robinson Road over 20 years ago and it was saturated with estate agents then, for much the same reasons as now. Plus ca change ........
Midland Realty has got it right - prices will come down when the US starts to raise interest rates, which is inevitable though no-one yet knows when. Then we shall have a reprise of 1998-2003 when everyone rushes for the door. It's the Hong Kong way Mike!
All spot on, except one detail I would like to question.

While it is true that retail leases are often concluded for two, tree or more years, it still shouldn't be too hard for property firms to get rid of them if they need to (and they do or soon will, indeed). Retail rents have been on the rise over the past years, and most landlords would probably have no problem to agree to an early termination of the lease. They are very likely to find a tenant willing to pay an equal or higher rent. Especially the lease-renouncing property agents are in an excellent position to arrange for this.

I suppose it would be too much to hope that those new tenants would be small, original, local businesses. For that, the overall rent levels are too high in most places. But even if we see half of the real estate agents make way again for Pacific Coffee cafes, **** Lau Shan dessert shops, Maxim bakeries, Sunshine Laundry services or Circle-K convenience stores, that would still constitute progress from the current real estate overload madness.

So yes, let's indeed hope that the much-needed property correction will soon bring some diversity back to our streets.
Probably because there are a few landlords in SF that don't see excessive profits from rent as the end all...they feel a responsibility to keep the neighborhood "real" and want it to remain interesting and local!
It's a city for locals and visitors...not purely for swarming masses of tourists and short gain profits.
Not totally true. In 1997 there was no QE and interest rate was high.
Yes indeed!
The exorbitant levels of rent crowd out regular businesses, replacing sustainable economic activity with unsustainable economic booms. I would also suggest a property tax based on the market value of a property (rather than the current net assessable value which is based on the theoretically annual rental income). Since the tax is based on the market value of the property, it acts as a passive disincentive against speculation and higher prices, because individuals would note the need to pay proportionately higher taxes. The higher taxes would also increase carrying costs which would discourage the purchase and withholding of empty flats from the market, thereby helping to increase supply and reduce rents.
Where Where??? And is it Circle K or OK?? Always confused me...


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