Monday, May 16, 2011

Hong Kong: Lofty Housing Prices, Low Capitalization Rates

As a global financial center, Hong Kong ranks third and is rapidly catching up with New York and London, bringing in expatriate financial workers to fuel the Asian financial expansion, as Hong Kong is clearly the financial hub of the Asia-Pacific region. Its shortage of land also has created some of the world’s highest real estate prices.

In a recent government auction of land, for instance, three sites sold for a combined price of about $700 million. Sung Hung Kai properties, for instance paid $4.49 billion Hong Kong Dollars, or about $577 million USD, for the sloping 3.63-acre former Lingnan University site, equivalent to $1160 USD psf of land or about $3650 USD per buildable square foot, as the maximum allowed buildable area is only about 180,000 square feet. Completed homes, having views due to the slope of the site, are forecasted to sell for over $5000 USD psf.

China Overseas Lands bought a 30,237sf site in Kowloon for HK$578 million, or about $74 million USD, equivalent to $2458 psf of land. They expect to build only ten houses, which will sell at a price of over $3000 USD psf. The price per buildable square foot is $1850 USD.

While these land prices might not seem high by Manhattan standards, when one considers the low density zoning, the price per buildable square foot is much higher than Manhattan.

Real estate prices have been rapidly climbing in sympathy with near-record sales prices, and a high-floor condo near Lingnan University recently raised its asking price to over $3000 USD psf, with other sellers reported to be increasing their asking prices from 10 to 30%.

The highest recent home sale, at 20 Peak Road, was HK$750 million, or almost $100 million USD, equivalent to the highest residential sale ever achieved in the U.S. The average luxury home price psf was estimated by CBRE at HK$21,351, or about $2700 USD per square foot, 14.5% higher than one year ago, and the overall residential property index jumped 24% from one year ago.

Meanwhile, just as in Beijing and Singapore, the Hong Kong government is taking extra measurements to prevent a housing price bubble fueled by speculators, instituting a 5 to 15% tax duty on residential resales within two years of purchase, and lowering LTV (loan-to-value ratios) to 50% on all non-owner-occupied residential properties, in addition to the aforementioned auction of government land (although the balance between supply and demand could have been improved with some up-zoning).

The vacancy rate for the luxury rental market was last measured by CB Richard Ellis at 1.9% and falling as highly paid financial industry workers are imported into Hong Kong.

The highest reported recent house rental was about $25,000 USD per month for a house at The Peak, and the highest flat rentals have been at about $20,000 USD per month. CBRE estimated the average rent psf for luxury flats at HK$37.70 psf, or about $4.75 USD psf. Serviced apartments, a typical housing option for a visiting expatriate, are leasing in the range of HK$44 to $57 psf per month, 13% higher than one year ago..

As for multifamily investment, unleveraged yield rates are now below 3%, fed thus far by ultra-low mortgage interest rates by local banks, lower than 1% until recently, but some lenders are now starting to raise rates, with Hong Kong Financial Secretary John Tsang warning consumers and investors not to count on cheap credit forever. Meanwhile, mortgage interest rates are also increasing in mainland China.

Is the Hong Kong housing market a bubble waiting to burst? Housing prices were actually slightly higher in 1997, before the Asian financial crisis of 1998, which was started by a real estate bubble in Thailand. This time, the Hong Kong government is doing its best to implement measures to achieve a “soft landing”, legislating conservative LTV ratios and short-term gains taxes unheard of in the United States.
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