Tough at the top
Hong Kong is the current record holder in several categories when it comes to real estate. Alex Frew McMillan finds out why
‘‘Clearly, paying a world-record price isn’t a good idea if you’re looking for a bargain. But then again, those high prices for real estate are all signs of the city’s success’’
Hong Kong’s industrial land is the most expensive on the planet. Its office space is either the most expensive in the world, or the second most expensive, depending on what you’re measuring. Residential real estate ranks up there as some of the costliest in Asia.
Nice. But what does that really mean? Should you interpret the records as bad news or good news? Or do they only matter to the statisticians.
Clearly, paying a world-record price isn’t a good idea if you’re looking for a bargain. But then again, those high prices for real estate are all signs of the city’s success.
Hong Kong ranks fifth in the most expensive cities in the world for expatriate living, according to the latest ranking from Mercer Human Resource Consulting, put out last June. That puts Hong Kong behind world No. 1 Moscow and No. 2 London, and only third in Asia – Seoul and Tokyo come next.
So life for expatriates is expensive, but they wouldn’t be living abroad if it wasn’t worth their while. You certainly wouldn’t want to be living in the cheapest cities in the world – Zimbabwe’s blighted capital Harare was just beaten off the absolute bottom by Asunción, Paraguay, apparently the 144th most expensive major city in the world to live.
When it comes to industrial land prices, Hong Kong is the undisputed leader of the pack. Hong Kong industrial land costs HK$1001.41 (US$128.34) per square foot, according to Colliers International’s latest figures, almost triple that of the runner-up, Tokyo’s Ariake area, where industrial space costs US$46.56 per square foot.
The statistics – and they aren’t a typo – are a result of Hong Kong’s quirky real-estate market.
Industrial land is typically measured in terms of the site area. That’s usually the same thing as the size of the building, for industrial buildings in the rest of the world, which are almost all single storey.
But Hong Kong has some of the very few industrial buildings that are multi-storey – with warehouses and logistics space for shipping and unloading sometimes stacking up eight or so floors.
The land would still be expensive even if you adjusted for the multiple floors of industrial space that developers build on an industrial site in Hong Kong. But it wouldn’t be quite so off the charts.
Using the plot ratio, the accommodation value of industrial land that’s for sale would be HK$800 to HK$850 per square foot.
In terms of industrial rents, Hong Kong’s US$16.92 per square foot per year ranks it only seventh in the world, behind the leader, the Heathrow area in London – which has Britain’s first multi-storey industrial project – and three Japanese markets, as well as Oslo in Norway and Dublin in Ireland.
Should we worry about the high cost of industrial land? Not much. Most manufacturing left Hong Kong long ago for southern China, so the shipping and distribution businesses use the only industrial space that remains. And no one is building much more of it.
“The supply of land in Hong Kong has been limited, and the new sites are usually designated for residential or offices,” says Simon Lo, the director of research and consultancy at Colliers International (Hong Kong). “There has been no completion of new industrial buildings for more than 10 years.”
The figures the company cites also look at top-notch industrial space, which sounds like an oxymoron, since it tends to be in the worst parts of town. But Colliers is measuring “first-tier” industrial locations such as Tsuen Wan and Kwai Chung, with the space used for logistics and warehousing.
Another factor driving up prices for industrial land in this city is that developers are looking to build up their land banks by paying land premiums to convert industrial land to other uses, such as hotels or commercial property.
Nostalgics may lament Hong Kong’s lost manufacturing businesses, in textiles, toys and the like. But the city’s workers are probably better off in terms of pay, prospects and health, working in the professional and service capacities that manage those businesses in China instead.
So, while the record-high price of industrial land reflects positive factors, it remains an excellent question why the government insists on reclaiming or rezoning more land to turn it into industrial-oriented space when the city has grown out of that phase of its life cycle.
Hong Kong is also a record setter in terms of office space. That presents more of a blend of good and bad news, depending on which side of the equation you sit.
Commercial landlords are loving life, charging rates of just under HK$200 per square foot per month at the top end.
“Hong Kong already has the highest prices in Asia, and the most expensive building in Hong Kong is No. 1 in the world,” says Piers Brunner, managing director for Colliers International in Hong Kong and chief operating officer for Asia. “On average, across the globe, Hong Kong is No. 2 just behind London for offices.”
Hong Kong’s office rents stood at HK$198.65 per month for December, including all the extra charges. Globally, Hong Kong’s US$15 per square foot per month average for Grade A office space equates to US$182 per square foot per year, just behind the US$209 per square foot per year in London’s West End.
Tenants, on the other hand, are having to pay substantially higher rates. At the end of February, the average Grade A office rent went past HK$100 per square foot for the first time, and the quarter-on-quarter growth was 15.3 percent. The pundits are predicting something around 8 percent to 10 percent commercial rental increases over the rest of the year.
The space squeeze is of course forcing tenants who were in Central to consider other parts of the city. Quarry Bay, Wanchai, Causeway Bay, Tsim Sha Tsui and now West Kowloon are the main beneficiaries.
So the city is getting larger, in a way. Maybe that is a good thing. The whole world doesn’t revolve around Central, after all.
Just like the expats paying high prices to live in expensive cities, companies are expected to continue paying these high rates. You can cry for Argentina if you like – Buenos Aires was third from bottom on Mercer’s last list – but don’t cry for Hong Kong.
Hong Kong residential property is no longer the worldwide heavyweight. Parts of London are considerably more expensive, Manhattan is right up there, too, and Moscow is a newcomer attracting eye-popping – and some would say unlikely – prices.
But a house at Severn 8 on the Peak sold recently for HK$240 million, or a price of HK$55,500 per square foot, a new record for Hong Kong.
You might want to wonder if there isn’t something better to be doing with your money if you were the person paying these record rates. Then again, luxury residential real estate has risen much more strongly than the rest of the market, so it could continue to be a good bet.
But the rest of us mortals are looking a lot lower down the real-estate section than the front-page headline. The latest figures on affordability from Centaline show that property owners are spending, for an average 400-square-foot apartment, 33.3 percent of their monthly household income on their mortgage.
That was down slightly from 35 percent in February and way, way off the record of 85.5 percent set in 1997. So while the top of the market is well beyond the property-bubble peaks, the rest of us have a way to go.