Why They Buy Hong Kong

September 15, 2010

It is a cliché now to say the surge of Hong Kong’s luxury property prices in recent years is largely attributed to Mainland Chinese buyers. But why? Why would Mainlanders have such impact? What are the underlying factors contributing to this phenomenon? Will the trend change in the foreseeable future? And, why are they purchasing Hong Kong properties, which are notorious for their high prices?

To answer these questions, let’s look at some fundamentals.

While Hong Kong is well known for its expensive residential properties, it is not, by all means, among the biggest cities in the world in terms of population. Beijing has a population of 22 million, Shanghai has 23 million and even Shenzhen, Hong Kong’s neighbour across the border, has a population of 9 million. New York has a population of 19 million and London, 7.5 million. Despite its relatively humble habitation of 7 million, Hong Kong ranks number one in luxury residential price in the world (we are talking about luxury property prices in general, not isolated record-setting prices in some cities).

One of the key factors underpinning the high property price in Hong Kong is the chronic shortage of supply, especially in the luxury property segment. Among the 1,150,000 residential units in Hong Kong, only 81,500 units are of 1,500 square feet and over (these units are classified by Hong Kong government as large units in its annual property review), representing 7% of the total stock. In recent years, the average annual supply of new large units is below 2,000 and it is forecast that supplies in the next two years will be no more than 1,500 per year. The bulk of the existing stock of large units is on Hong Kong Island (50%), with Kowloon taking up 23% and the New Territories, 27%. Hong Kong Island has no more land for luxury residential development, as harbour reclamation for residential use is impossible and its country parks are steadfastly protected from any form of urban development. Any luxury residential development would have to come from redevelopment of older buildings, and the net supply is therefore just a trickle.

At the other end of the balance, demand is ever-increasing. According to a recent survey by a private bank, Hong Kong has 70,000 high net worth individuals with net asset value exceeding US$1 million (excluding their self-occupied homes). It is reckoned that there is upgrading demand from 7,000 people (10%) in this segment annually. In the last three years it is estimated there were about 4,000 Mainland Chinese who bought Hong Kong luxury properties in primary and secondary markets. According to Hurun Report, Mainland China has 875,000 people with net worth over RMB10 million, 55,000 people with more than RMB100 million and 1,900 with over RMB1 billion. If only 1% of these wealthy people would buy into Hong Kong luxury property annually, that represents 9,300 buyers. On top of this are the wealthy expatriates in Hong Kong, who are estimated to generate 2,000 potential buyers annually. All these add up to a bit less than 20,000 potential buyers for luxury property each year. Apparently it overwhelms the trickle of supply. This severely skewed balance picture of supply and demand explains on a large part why Hong Kong’s luxury property has always enjoyed robust sales and the price hike seems to have no sign of abatement.

When we look at the reasons why Chinese buyers are particularly favouring Hong Kong luxury property, the following answers usually emerge. These include long term investment value and asset value appreciation, protection of private property rights, transparent market, comprehensive legislation and law enforcement, high liquidity of real estate asset, stable rental return, superb maintenance and excellent estate management. To most Hong Kongers, these are matters taken for granted but for people from across the border, they are rare and unique, and they are non-existent on the Mainland. Many of these factors also exist in other leading cities around the world but Hong Kong enjoys yet another unbeatable advantage, that is, it is at the door step of China.

By Koh Keng-shing