5 April 2017 - The conspicuous investment of Chinese property developers continues to dominate the Hong Kong property news cycle. Recent headlines detailed the record breaking land purchase of a site in Ap Lei Chau for HK$ 16.9 billion. The buyer, Logan Property Holdings and KWG Property Holdings, are based in Shenzhen and Guangzhou respectively. The deal topped market valuations by 50 per cent and is Hong Kong’s most expensive residential land sale to date. With local developers being priced out of market, the high bids placed by Chinese developers could potentially signal even higher property prices down the line.
The increased investment of mainland developers within the Hong Kong property market is a symptom of both the yuan’s depreciation in 2016 and regulatory risks in China. In 2015, according to DTZ/Cushman & Wakefield, institutional investment in Hong Kong real estate by Chinese developers only amounted to HK$1.46 billion. In 2016 the figure rose swiftly to HK$6.6 billion. To put this into further context, according to Midland Realty, land purchases by Chinese developers went from 5 per cent of land sold in public land auctions in 2013-2014 to 29 per cent in 2015-2016.
Given that property prices in Hong Kong have continued to increase by 10.8 per cent on a year-on-year basis despite the introduction of the stamp duty in November, and that according to the Ratings and Valuation Department, January’s home price index rose by 0.62 per cent (recovering from shaky market sentiment in December), the influx of Chinese capital does not bode well for affordable housing in Hong Kong. In fact, it almost renounces government policy.
The Hong Kong government plans to sell 28 plots of land for private housing in 2017 - 2018 which could provide an additional 19,000 housing units on the market for the Hong Kong public. Yet looking to recent land sales in Wong Chuk Hang, Kai Tak and Ap Lei Chau bought by Chinese Developers, where units are expected to be priced at HK$17,000, HK$24,000 and HK$23,000 per square foot in order to recoup the high costs of initial investment, new developments hardly present a feasible option for the average Hong Kong buyer.
The sentiment amongst Hong Kong developers has noticeably soured with the chairman of Hong Kong based Hang Lung Properties remarking that the Hong Kong property market is one of “short-term irrationality” and the chairman of Sun Hung Kai Properties, Raymond Kwok, characterizing the price points offered by Mainland developers as “crazy bids”. That being said, local developers have also partnered up with Chinese developers as a way forward, forming alliances to participate in government land sales.
Moreover though the Hong Kong market presents an attractive option for Chinese developers looking to diversify, further interest rate hikes could dampen the appeal of investing in Hong Kong property whereas further capital restrictions by Beijing could make the financing of outbound deals for Chinese developers more difficult. Either way, given that Chinese developers listed in Hong Kong such as China Vanke and CIFI have access to offshore funding, their continued investment in Hong Kong will remain for the foreseeable future. Ultimately property prices in Hong Kong are predicted to rise yet again.
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