MAGAZINE 43 MARKET WATCH

‘‘For a quality 800-square-foot apartment, tenants will pay HK$45,000 per month—and you can add on HK$10,000 extra for an apartment with a roof. In Bel Air, this kind of rental would get you 1,300 square feet plus facilities''

You only have to look at the high-end, branded shops and restaurants springing up in SoHo to see that the area still has plenty of room for capital appreciation. Even three years ago, there were as many old Chinese printing and porcelain shops as there were trendy bars and coffee shops within the neighbourhood's boundaries. But nowadays these local businesses are in the minority, and there isn't a single dai pai dong to be seen.

Last year commercial rents rose on average 50 percent (and as much as 80 percent), pushing out the majority of the smaller SoHo concerns. Consider that a Chinese developer recently bought and renovated a ground floor commercial space just off Staunton Street for HK$38 million; and he's now prepared to wait to achieve his asking price of HK$60 million.

With all the street-level gentrification, the face of SoHo is certainly changing but this is doing little to diminish its appeal to expats. On the one hand the area is getting increasingly gweilo friendly (check out the rooftop Jacuzzis) and on the other it's managing to retain its old-world charm. The modern influence is visibly pushing through, but developers don't care what buildings look like from the outside, so the area's antiquated "Shanghainese" feel is being retained.

Expats want to live in SoHo; it's not a temporary trend and why would it be when here you can experience the best of both worlds (Chinese and Western) within walking distance of the Central Business District. Quality renovated flats are hot commodities, and the prices being asked are no longer for the ordinary expat; landlords and home-sellers are now talking to well-heeled corporate players who are prepared to pay Mid-Levels West prices.

Last year saw both rents and selling prices in SoHo increase 35 percent on average. A well-renovated 800-square-foot (net) unit now goes for HK$6,000 to HK$8,000 per square foot; a 400-square-foot to 500-square-foot (net) unit for HK$5,000 to HK$7,000. This is truly incredible when you think that back in the day (prior to 1993) sales prices in SoHo averaged at HK$2,000 per square foot.

Notably too the supporting rental is very strong: for a quality 800-square-foot apartment, tenants will pay HK$45,000 per month—and you can add on HK$10,000 extra for an apartment with a roof. In Bel Air, this kind of rental would get you 1,300 square feet plus facilities.

Right now your chances of buying a run-down doer-upper in the heart of SoHo — from the original Chinese owners — are slim: supply has dropped to 20 percent. Foreigners now occupy 50 percent to 55 percent of flats and, of that percentage, at least 40 percent are homeowners. Of the flats with roof terraces, 75 percent are expat-owned.

If you're looking to invest at the bottom end, and can't afford a prime property with rooftop space, opt for a basic unit in a newer building with a lift. A 288-square-foot rooftop flat, in a building with no lift on Staunton Street recently sold for HK$3 million; a 320-square-foot unit with no garden in a block with a lift on the same street is now selling for around HK$2.8 million.

Perhaps more importantly, the boundaries of SoHo are expanding and there's plenty of potential for investment outside the traditional confines of Lower Aberdeen Street, Lower Graham Street, Gage Street and Lower Peel Street. Even last year, a location within five minutes walk of the escalator was all-important, now a 30-minute walk will suffice.

In Sai Yin Pun, the market is not so high at present, so prize units with rooftops (or adjacent units that can easily be converted into large, single apartments or duplexes) are still affordable. In Square Street, a 500-square-foot (gross) apartment plus roof is selling for just HK$2.5 million. Small units without outdoor space are currently going for a song because the serious investors are busy buying up whole blocks.

The bottom line when it came to buying in SoHo used to be that you needed cash funds, and bank support remains minimal. If the transaction price for your property is HK$4 million, the bank valuation is going to be HK$2.5 million at most, and the bank will only loan 70 percent of that.

To get around this, a growing trend sees investors going in with friends or a friendly consortium to cash in.

A number of companies now put investors together in order to buy run-down SoHo properties and renovate them to a high standard. Cameron Spencer of Capital Partners says that while purchase prices in SoHo are sky rocketing, there is still plenty of value to be added if you get in at ground level.

"Given the right location and decor, we can really pop the yield on a square-foot basis, and tenant a flat out for around HK$65,000 per month," he says. "And we can turn something around in three to four months. We now have two adjacent ‘colonial transforms' with a rooftop in Square Street; these will rent for between HK$40,000 to HK$45,000 per month and we are asking HK$5.8 million each. A roof adds 25 percent to 30 percent to the value."

Cameron would like to see the whole of SoHo transform in the next five years. "We have a corporate responsibility to make SoHo more liveable. The fact that the government requires most families to live in 500 square feet is atrocious."

The real gains in SoHo are to be made by buying a whole block: this way you can control rental and resale prices by upgrading not only individual flats but also communal areas.

In mid-2006, investors bought a building in Square Street (the ground-floor shop plus five residential units) for HK$12 million. One year later, the property sold for HK$18 million. Half a year ago, a group of expats bought two buildings on Staunton Street for HK$128.38 million each, they are now on the market for HK$220 million.

It's safe to say that prices in SoHo won't fall this year. There may be fewer transactions but, even if the stock market is down, prices will remain bullish.

Already in the past few months, the government's plans for the former prison on Hollywood Road have led to a flurry of activity in the immediate vicinity. Investors are choosing to act now, banking on the area's potential once the site is developed to house museums and malls.

A year ago, an investor bought two adjacent units on Chancery Lane for HK$2.6 million each. At the time these rented for between HK$12,000 and HK$14,000 per month. He spent HK$1 million combining the two and upgrading the decor. The 1,000-square-foot double unit, plus 400-square-foot rooftop garden, is now on the market for HK$8 million.

The government's plans to redevelop SoHo's ancient market sector — Peel Street, Graham Street and Gage Street — is also boosting prices. The government is buying property in the area for HK$8,500 per square foot; formerly the asking price rarely reached HK$5,000.

Few tenants in the heart of SoHo would now consider selling their properties for less. What's more, property owners in the streets that fall just outside the government-development area, are also asking HK$8,500 per square foot. Once the area is furnished with hotels, shops and green areas, prices in the immediate vicinity are bound to go up.

Added to this, Kerry Property's new project on the corner of Mosque Street and Shelley Street, due for completion in early 2008, is driving up prices. Units are well placed on the escalator, with SoHo and city views, and are expected to go for between HK$9,000 and HK$10,000 per square foot gross.

On the downside, the movement of Forbes-listed companies to the ICC may put pressure on SoHo's rental prices. But the commute is only about 15 minutes door-to-door, so even if West Kowloon really booms, you can bank on the fact that SoHo won't suffer.