Caixin
Nov 21, 2017 07:17 PM
ECONOMY

Real Estate Investors Flood Into Hong Kong, Fleeing Mainland Curbs

Property sales in Hong Kong soared in the first half of 2017, riding on a tide of large land and asset deals involving mainland capital. The situation has precipitated Hong Kong to rise to 13th in the 2018 investment prospect rankings, up five places from this year, according to a new report. Photo: Visual China
Property sales in Hong Kong soared in the first half of 2017, riding on a tide of large land and asset deals involving mainland capital. The situation has precipitated Hong Kong to rise to 13th in the 2018 investment prospect rankings, up five places from this year, according to a new report. Photo: Visual China

Chinese real estate developers are doubling down on Hong Kong’s property market, as market curbs on the Chinese mainland depress the profitability of real estate in cities there, a report from a leading accounting firm said.

Property sales in Hong Kong soared in the first half of this year, riding high on a tide of large land and asset deals involving mainland capital. This precipitated the special administrative region’s rise in the investment prospect rankings for 2018 to 13th, up five places from this year, according to a report on real estate investment trends in 2018 published by accounting firm PwC and the Urban Land Institute (ULI), a research organization.

Many mainland real estate developers have bid for land plots in Hong Kong this year, smashing records for the price of land deals.

A plot of residential land on Hong Kong’s Ap Lei Chau island was sold to a consortium of real estate developers Logan Real Estate and KWG Property for a record-breaking HK$16.9 billion ($2.1 billion) in February. However that record price for a piece of Hong Kong residential land has been broken again by another deal involving mainland developer Shimao Property.

Ferocious competition, surging land prices and government-mandated curbs have resulted in lower returns for developers on the mainland, K K So, partner and Asia Pacific real estate tax leader with PwC, also known as PricewaterhouseCoopers, told Caixin.

“These deals show that Chinese developers are looking for other opportunities outside the mainland market, which is strained by low returns,” he added.

Chinese mainland investors are pouring money into Hong Kong even though investment opportunities in the region have been reduced by elevated asset prices and a lack of transactional assets, said David Faulkner, vice director of ULI Hong Kong.

“For many smart investors, Hong Kong still provides lots of opportunities for investment,” he added.

The sheer volume of cash flowing into real estate is the main factor affecting the market’s development across the Asia-Pacific region, the report said, with sovereign funds and institutional investors scrambling to invest in the sector, changing the pattern of investment behavior.

“This excess of abundance is making life increasingly difficult for anyone looking to invest in Asian real estate.” the report said. “More buyers doesn’t only mean more competition, higher prices, and lower yields. They are also leading to increased appetite for risk and a growing exodus into alternative markets and asset classes that normally would not register on investors’ radars.”

Many core and opportunistic investors have started to eye properties that used to be overlooked, such as shared offices, data centers, affordable housing projects, self-storage units and resorts.

The list of cities ordered by investment prospects in 2018 reflects the growing divergence in the strategies chosen by different types of investors. While big players tend to look at maximizing returns by commanding higher rents in cities such as Sydney and Melbourne, investors looking for stable long-term yields higher than sovereign bonds are drawn toward Tokyo, despite a declining outlook for rental growth.

Others are focused on tapping returns associated with long-term economic growth in developing markets such as India and Vietnam.

Contact reporter Pan Che (chepan@caixin.com)

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