Polarisation

June 10, 2010

Despite the market gloom following the government’s two lackluster land auctions (Tung Chung and Fanling) in May, a 173,800 square feet residential site in Homantin, an upscale location in Kowloon, was sold for HK$10.9 billion last month after keen competitions. The price was above even the most bullish prediction. The market was taken aback, awed by such an audacious move by one of Hong Kong’s biggest property developers, Sun Hung Kai Properties.

The value represents HK$12,500 per square foot buildable floor space (accommodation value), and this land cost alone is higher than the prevailing price of completed properties of a similar class in the neighbourhood, which is about HK$11,000 per square foot. The total cost including construction will be more than HK$16,000 per square foot. To achieve a reasonable profit, the future selling price of the completed building will have to be HK$20,000 per square foot or above. That said, it is clear that the developer was betting on substantial price growth in the next few years in this district. Last month, Falconridge, a luxury block of apartments at 35 Barker Road, was sold at a private auction for a staggering HK$1.82 billion, which translated into an accommodation value of $68,228 per square foot buildable floor space, setting a new record for Hong Kong and probably for the whole world. Apparently, luxury properties still enjoy huge popularity while small to medium flats seem to have lost favour, at least for the time being.

Why is the market so polarised? Let’s look at some figures.

At the end of 2009, there were close to 1,100,000 residential units in Hong Kong, of which about 1,000,000 or 90 percent are small to medium units. The rest are large units with gross area of 1,500 square feet and above. According to government statistics, there are about 1,000,000 households living in private residential units (the rest are living in government housing including home ownership scheme housing). Obviously, supply and demand are in balance as far as the mass market is concerned. The supply and demand in luxury market is heavily skewed, with demand outstripping supply by a very wide margin. We estimate there are potentially 150,000 households in Hong Kong that have the actual need to live in large units and most of them are financially capable. On top of this is the demand from wealthy mainland Chinese and affluent expatriates. There are no reliable statistics available on the actual demand, but the fact that luxury property prices keep climbing is a testimony of the severe imbalance. There is then no surprise the site in Homantin which is suitable for developing large units has fetched such a staggeringly high price.

By Koh Keng-shing