In Hong Kong’s twisted property market, location is no longer king
Albert Cheng says property developers eyeing cash-rich mainland investors have learned to pile on the luxury in new developments outside posh areas. And their clever marketing is paying off
The golden rule in any property investor’s playbook is “location, location, location”. In a bull market, the price of real estate in the top locations takes the lead and rises; in a bear market, the price does not drop drastically. For this reason, putting money in a well-situated property is one of the safest havens for investors.
History speaks for itself. In the post-war years, much of Hong Kong people’s wealth was accumulated through property investment. And buying the cheapest property in a prime location was always better than buying the most expensive property in an inferior area.
But times are changing. With the rise of China and the subsequent inflow of mainland capital, ostentatious investors from across the border now dominate the Hong Kong market. And their style of investment has turned the golden rule upside down.
As we all know, property prices have been rising more or less continuously since the 1980s, and, most of the time, the market has been steered by luxury property. Properties in the top districts, such as on The Peak, in Mid-Levels and the southern districts, excel in the market, and their prices reach record highs every year. These luxurious properties were the most defensive assets of Hong Kong people during the financial crisis of 1997. They have been the mainstay of the real estate market.
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After the economic downturn, in 2005, thanks to the Individual Visit Scheme that allowed individual mainland tourists to come to Hong Kong, and the Closer Economic Partnership Arrangement between Hong Kong and the mainland, the property market recovered. The prices of luxury residences in the prime districts were the first to rise. Again, the wisdom of property investment prevailed.
However, after the global financial crisis hit in 2008, the Chinese government put together a 4-trillion-yuan stimulus package (HK$4.7 trillion in exchange rates today) to boost the economy. The measures caused a huge flow of capital into Hong Kong’s real estate market.
In 2012, after becoming chief executive, Leung Chun-ying imposed cooling measures on the property market. The policy appeared to be aimed at combating real estate hegemony; however, all it did was destroy the housing ladder of the Hong Kong people. Mainland investors with their immense capital were unaffected by the cooling measures. They carried on buying luxury properties, which drove property prices overall to spiral frantically to a level beyond what most people could easily afford.
For most well-off local people, the cooling measures did put a brake on their buying. Unless they have abundant amounts of cash, they will not acquire new properties in such an overheated market. Only mainland investors have sufficient cash to buy luxury properties in Hong Kong.
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To cater to the needs of these mainland investors, the market has become twisted. The price per sq ft of gross floor area of upmarket residences in the traditionally posh areas of Mid-Levels, Repulse Bay and so on is holding steady at over HK$30,000. Yet, this is now cheaper than the new developments in Mid-Levels West and East, Cheung Sha Wan, West Kowloon, North Point and other places, where prices have risen to between HK$40,000 and HK$60,000 per sq ft.
The golden rule of “location, location, location” has been replaced by the rule of “marketing, marketing, marketing”.
These new housing estates have been packaged as “castles in the city” with luxurious clubhouses and facilities. Developers pile on the opulence to woo mainland investors.
Sooner or later, this overheated market is going to cool and the property bubble will burst. Local investors should keep a clear mind and avoid falling into the marketing traps set by the developers. When the market goes down, these unreasonably priced properties will be the ones that see the biggest price falls. Hong Kong people should bear in mind the lessons learned in the past two financial crises.
Albert Cheng King-hon is a political commentator. [email protected]