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Categorized | Property

Mainland money distorting Hong Kong land prices, tycoon warns

Posted on November 23, 2016

Hong Kong developers are unable to compete with their big-spending mainland Chinese rivals, one of the territory’s wealthiest tycoons has warned, as property prices in the world’s least affordable market surge to ever higher levels.

Lui Che-woo this month lost out in an auction for a Hong Kong site that was acquired by a subsidiary of HNA, the acquisitive mainland conglomerate, at double the price paid for a similar site in 2014.

The site went for HK$13,500 ($1,740) per square foot — similar to the going rate for completed apartments nearby.

“It is hard for local businesses like us to chase after that,” Mr Lui, a property and casino magnate worth more than $11bn according to Forbes, told the Financial Times. “Mainland companies have the ability to do it but we don’t.”

Surging home sales to wealthy Chinese investors have sparked concerns of market distortion in global cities from Vancouver and Sydney to New York and London.

Now China’s deep-pocketed developers are also getting in on the act, with a spike in land acquisitions in Hong Kong prompted by the falling value of the renminbi, a growing desire to move capital out of the mainland and increasing restrictions on real estate investment at home.

Mainland developers acquired 44 per cent of the residential land sold by the Hong Kong government last year, up from just 7 per cent in 2012, according to calculations by Spacious, a property listings website. In the year to date, mainland companies have bought 39 per cent of the land auctioned.

“In addition to the devaluation of the renminbi, Chinese developers are being driven by lower taxes in Hong Kong, high land prices in the mainland and easier access to finance in Hong Kong compared to other overseas markets,” said James Fisher, director of market analysis at Spacious.

Hong Kong, a densely populated, semi-autonomous territory of 7m people, has seen its property market pumped up despite a deteriorating economic outlook.

After a brief dip, residential property prices have rebounded to near the record hit in September last year, according to government data.

The weakening renminbi and the search for higher investment returns offshore have funnelled money into Hong Kong’s residential and office markets, with leading mainland companies Evergrande and Everbright spending more than $1bn to acquire high-profile skyscrapers in Hong Kong this year.

Inflows from the mainland made Hong Kong the second most active commercial property market in Asia after Tokyo in the first half of this year, with $6.8bn of deals, up 17 per cent on the previous year, according to a report by PwC, the financial services group, and the Urban Land Institute, a research body.

Lui Che-woo, chairman of Galaxy Entertainment © Bloomberg

At the same time, rents for the upper floors in prime skyscrapers have continued to surge because of interest from mainland companies. Such office space now leases for $278.50 per square foot, the most expensive rate in the world and nearly double the cost of the second and third most expensive cities, Tokyo and New York.

“Some mainland investors simply think it’s nice to have something in a major financial centre like Hong Kong, especially if they can find an iconic building and attach their name to it,” said KK So, an expert in real estate and tax at PwC.

Mr Lui says the high cost of housing is the “biggest issue” facing Hong Kong but he is not sure if the government’s recent decision to increase stamp duty for second-home buyers will have the desired effect of stabilising the market.

“I need to wait and see for the next few months,” he said.

Mr So also remains to be convinced.

“The government is trying to reassure Hong Kong people that there will be a steady supply of property in the coming few years,” he said. “But is it good enough to satisfy the demand out there from local home buyers, locals with investment needs and overseas investors, particularly those from the mainland?”