This article originally appeared in HongKongEcho 84 - REAL ESTATE: The price to pay
Central will increasingly be dominated by mainland firms. So says Denis Ma, Head of Research at JLL, who spoke to us about how Chinese investment is driving up prices and changing the face of city as we know it.
HongKongEcho: Chinese investment is nothing new. But how has its influence been changing the residential market?
Denis Ma: Maybe three to four years ago, when people were talking about the residential market and the Chinese, it was more on the buyer-to-end-user side. It was very much talk of them coming in with loads of cash, pushing up prices and making it generally unaffordable. So the government tried to address this by introducing the buyer’s stamp duty, a 15% up-front tax on all non-locals. Unfortunately it affected all expats, because the government didn’t want to single out mainland Chinese buyers. Since the levy was introduced, we’ve noticed fewer Chinese buyers in the local residential market. From that perspective, it has helped cool down the market.
What has been interesting is that Chinese investment is again back in the news, but this time regarding developers rather than buyers. Traditionally, the market has been very tightly controlled by just a handful of local developers. Therefore someone coming in and breaking up that dominance hasn’t been seen as a universally negative scenario. Chinese developers have definitely given the local conglomerates a run for their money. The biggest impact right now is that they’re pushing up prices. Land prices are going up, and if you walk that through to its conclusion, that also means house prices will be going up.
What they are doing is unprecedented. The government had put in place a ‘Hong Kong Property for Hong Kong People’ policy a few years ago. They acknowledged that housing is a big problem and decided to put some restrictions on land sales, limiting built units to be sold – whether in the primary or secondary market – only to Hong Kong residents through the next 30 years. The first of these, One Kai Tak, was recently launched onto the sales market and pricing went through the roof. Ironically, One Kai Tak was built by a Chinese developer.
HKE: Has the strategy backfired?
DM: Somewhat. The reality is that those ‘Hong Kong Property for Hong Kong People’ properties should have a traded at a discount on the market. But again, if you look at all the land sales results over the past year – the developers are paying above and beyond.
HKE: What’s pushing that? Why now?
DM: It really comes back to the fact that there is a lot of uncertainty in the property market in China. The Chinese government is trying to balance between stopping it from overheating without tipping the market over. The developers know this, so they are making sure that they diversify. Hong Kong is an easier market for them because it’s relatively more liberal. In other countries, there might be some protectionism in place or you might need to make partnerships with local companies. Also from a cultural perspective it’s more familiar.
HKE: How have Hong Kong developers reacted to this? Ronnie Chan, Chairman of Hang Lung Properties, stated recently that many Hong Kong developers “would not bid for land at the moment, because the price has gone beyond what’s reasonable”. Is that a fair statement?
DM: That is how [Hong Kong developers] view it at the moment. With the price rises, a lot of the local developers are starting to look overseas. At the same time they are also starting to put in above market bids as well.
HKE: Moving to the office market: we’re seeing many Western companies moving out of Central and mainland firms coming in. Is that going to continue?
DM: At the rate we’re going, yes. The business environment in general hasn’t been that great over the last couple of years, especially for Western firms. But Chinese firms are still expanding in the city as they seek to diversify and grow their business. It’s also part of the Chinese ‘going out’ strategy. The push for Chinese companies to grow their business outside of China is being driven by tightening returns back home as well as preparation from the opening up of the domestic market to foreign players. To internationalise, a lot of Chinese companies will seek to use Hong Kong as a stepping stone. A couple of policies have really accelerated this trend in recent years. Firstly, the offshore RMB market and the Stock-Connect investment channel, which is bringing in a lot of finance. Secondly, One Belt One Road; those infrastructure projects will need financing and professional know-how that Hong Kong can provide.
HKE: Why the obsession with Central?
DM: Chinese firms want to be in trophy buildings. In addition to expanding their business into global markets they are also trying to build a brand. And it’s not just building their brand overseas but back home as well. If you tell people that your office is in IFC – and they know IFC! – then you’re business will often be considered to be quite successful. So that’s their focus. As a brokerage firm, we’ve tried to introduce some of the new high quality office supply coming online but they mostly say, “No, we want to be in Central”. Still, their thought process is slowly changing. We’re now starting to see them branch out into Admiralty and Wan Chai / Causeway Bay, but it’s been a process. Chinese corporates often will almost prefer to be in a Grade B building and wait for the perfect opportunity to pop up in Central than commit elsewhere. That’s what’s unique: the urgency isn’t there.
HKE: Do they have any other requirements; they want a prestigious address, but what else?
DM: From a leasing perspective, their requirements are typically small. We’re talking about 5,000 sq ft, maybe even less. They want to be in trophy buildings, ideally in Central. I say that because ICC is ‘acceptable’ for them, even though it’s not in Central. Properties with harbour front views or high visibility also get the nod. If you look at the Grade A buildings they have bought outside of Central, most have high signage visibility. As for the banks or bigger occupiers, what we tend to find is that they will lease, to a certain extent, but ultimately they want to buy. So the big problem is that we have a number of [Chinese] banks that want to buy buildings but they also want to be in Central.
HKE: Will that change with places like Kai Tak, the supposed new ‘CBD2’?
DM: At the moment, no. Their focus remains primarily focused on Central and there are opportunities starting to emerge. The upcoming sale of the Murray Road carpark, the first plot of commercial development land in Central tendered by the government in 20 years, is drawing a lot of interest. And we’re fairly confident that it will be awarded to a Chinese buyer. Land in Kai Tak, part of the city’s future second CBD is also selling now – but surprisingly, there’s not a lot of interest.
HKE: Is this obsession with Central sustainable? What are the implications for Hong Kong?
DM: I think it’s definitely sustainable. It will ebb and flow. In time, Central will become largely dominated by Chinese companies.
Rents are going up at the wrong time for all non-Chinese companies, so there’s a push to find cheaper real estate and at the same time, there’s a lot of good high quality supply coming to market, not just in Kowloon East. From a tenant’s perspective, moving from Central to Kowloon East is a big jump. But Swire’s developments in Quarry Bay, which is on Hong Kong Island, are slowly drawing more people out.
HKE: On the flipside, is there a possibility that we become too reliant on mainland firms with their incredible spending?
DM: Absolutely. Even last year, when a lot of people were trying to talk down the mainland economy, things did get a little bit shaky, and demand weakened a little. Right now, it’s largely demand from Chinese firms that is driving up rents.
Chinese companies are the only group of tenants right now who are willing to pay premium rents. And a lot of people are asking why? Firstly, they are fighting for that space among themselves, and that pushes rents up. But secondly, from a landlord’s perspective, it’s a risk assessment process. Landlords can’t do the same level of due diligence and background checks on Chinese firms that are coming in with offers. They have to weigh up between a bank that’s been in business for over 100 years, or new firms coming in who are willing to pay higher rent, but you have absolutely zero background information on them. So what the landlords are doing is asking for the premium and often for a bigger deposit to mitigate some of their concerns. Ultimately that also pushes rents up.
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