On the receiving end: mainland Chinese money pours into Hong Kong real estate
Hong Kong could overhaul New York City as the most popular recipient of mainland real estate investment in 2017
Antonio Wu is deputy managing director of capital markets and investment services at Colliers International. He reveals why mainland companies focus on property investment in Hong Kong.
How much money have mainland companies invested in Hong Kong real estate?
According to our research, investment from the mainland recorded an all-time high in the first quarter of this year. The value of investment activity soared 213 per cent year-on-year to HK$36.1 billion. In the residential sector, mainland developers bought seven of the 23 housing sites sold in 2016. The rest went to local companies. Their share of the land market accounted for about 40.2 per cent in value terms last year. Their investment in Hong Kong real estate last year alone surpassed London and Sydney, making Hong Kong the second most popular destination after New York City. Hong Kong could overhaul New York City as the most popular recipient of mainland real estate investment in 2017. Office buildings have been the most popular property among mainland corporate investors and they have shown interest in acquiring iconic buildings and strata-title offices to hedge against future rent increases.
What makes Hong Kong so attractive to mainland corporate investors?
Hong Kong enjoys less government intervention and greater transparency than mainland property. The yuan’s depreciation has encouraged companies to park currency offshore as a hedge. Investors in Hong Kong can enjoy notable capital value growth in the residential, office and industrial sectors. Developers can also enjoy a competitive advantage by borrowing up to 100 per cent of the land costs and 50 per cent of the construction costs, from which smaller developers can benefit.
What are the implications for local real estate companies? What advice do you have for them?
With an increasing number of mainland investors and developers setting their sights on Hong Kong, local players have to develop new strategies to cope with the changing landscape in order to maintain their long-term presence. Mainland developers’ aggressive bidding has put local developers on the defensive. Local developers with a large agricultural land bank can gradually convert farmland into residential land to maintain higher profit margins. Smaller local developers should focus on areas outside the urban core area to improve their chances of winning in public tenders, or redeveloping smaller sites for residential use. Forming consortiums with medium-sized mainland developers can be a win-win solution for both parties. Hong Kong market expertise and knowledge of building regulations from a local player would be very useful to mainland developers; in return, Hong Kong developers could be more effective in penetrating the mainland.
Will mainland developers be able to sustain their business model in Hong Kong?
If Chinese developers are to develop a sustainable business in Hong Kong, they will need to create a long-term strategy to build up their land banks. Mainland developers have won prominent sites through government land sales to replenish their land banks. In the medium- and long-term, they should look beyond the urban core as most of the new development areas will be in the New Territories. Future sites atop MTR stations and sites prepared by the Urban Renewal Authority will constitute a stable supply of residential development in future. In addition, they can tap into the large pool of industrial properties as an alternative to increase their land resources for residential projects.