Expert opinion	Back to index

Mainland mainline

The sputtering Hong Kong property market has left few encouraging signs as the summer winds down. Although prices have not fallen far, the number of deals has collapsed. Buyers and sellers seem to be in a bit of a standoff, with buyers waiting to look for good deals and sellers unwilling to lower their asking price by much.

One of the bright spots last year and at the start of this one was the effect mainland Chinese buyers were having in Hong Kong. Brokers say they noticed a dramatic change in the amount of interest from across the border.

“In 2008, the number of buyers from mainland China has increased exceptionally,” says Yale Yeung, the Director of the China Department at Century 21 Surveyors.

It is hard to say exactly how many mainlanders are investing in Hong Kong homes. Mainland buyers may purchase property through Hong Kong-based relatives, and the statistics for property purchases don’t track people by nationality, which may be misleading anyway for people who have residence in two places.

“You can’t really find any official data to show how many mainlanders are buying property in Hong Kong,” says Buggle Lau, the Chief Analyst at Midland Realty. “Some of them have overseas passports, and some have Hong Kong residency, even though they speak Mandarin and are from the mainland. It’s hard to draw the line.”

But brokers know they have been coming through the door at their agencies. Clarence Chow, the Senior Associate Director for the Peak and Island South area at Centaline Property Agency, estimates that around 20 percent of the transactions that closed in his area last year went to mainland Chinese.

“It is quite a big portion,” Chow says. The figure rises to 30 percent for some new developments in Kowloon and even as high as 50 percent for new developments in the New Territories, which has seen a lot of speculative buyers moving across the border from Guangdong.

Brokers distinguish between speculators, who favour properties in the HK$2 million to HK$3 million range, and investors, who are looking at properties that are substantially more expensive. Most of the speculators are from Guangdong or other nearby provinces, while the investors are mainly the very wealthy from Shanghai, Beijing and other large cities in northern China.

The speculators arrived thanks in part to a rapid fall in property prices in nearby Chinese cities such as Shenzhen, where values fell 10 percent to 15 percent in the last few months of 2007 and the number of transactions dropped even faster. Since prices had roared ahead some 350 percent in the past three to four years in Shenzhen, they took some of those profits and decided to put them to work in Hong Kong.

Those buyers tended to favour new developments in the New Territories or Kowloon, with Central Peak in Tin Shui Wai, the Grand Waterfront in To Kwa Wan and One Silver Sea in Tai Kok Tsui finding favour. Sheung Shui, Tai Po and Shatin were also popular stomping grounds.

Since prices have dipped around 5 percent in many of these new developments over the summer, speculator interest has dwindled, and is now limited to the mega rich, who are looking for trophy properties either to use themselves or to impress friends – or both.

Property seekers from the mainland are now more likely to target upscale Kowloon neighbourhoods near the railway lines to the mainland, such as Ho Man Tin and Hung Hom, as well as properties on Hong Kong Island.

“What they’re looking for is something special, something unique that can show that they have the money,” Chow says.

Take Severn 8, the Sun Hung Kai Properties development at 8 Severn Road on the Peak that has been setting and resetting records for apartments in Hong Kong, and indeed Asia. This summer, House 2 sold for HK$283.9 million. At 5,067 square feet, it set a new record for Hong Kong of HK$56,022 per square foot.

House 2 went to a mainland buyer. All 22 homes have now sold, and Chow says that of the 13 deals closed by Centaline, eight went to non-Hong Kong buyers, from mainland China and Vietnam.

Bel-Air in Cyberport is also proving popular. Coming in at around HK$11,000 per square foot, prices are still high but more affordable for wealthy middle-class buyers.

“When they buy something, they look for something that people know,” Chow says. “Bel-Air is very popular with mainland buyers because it is very good for rental and is also very marketable.”

Sometimes the result is a little surprising. Dynasty Court, a development on Old Peak Road that set the old record per square foot during Hong Kong’s property bubble in 1997, isn’t popular in China despite having a good name in Hong Kong. The headlines from 1997 didn’t make a splash on the mainland back then, and it’s old news now. “They won’t buy that because they don’t know it,” Chow says.

Cathy Chiu, the Senior District Manager at Ricacorp for Pokfulam and Western, agrees. “Mainland buyers like properties with facilities, and famous ones,” she says. “Braemar Hill is a good area but they don’t like it because there isn’t a famous building. But with Bel-Air, The Legend or the Peak, they might have interest because these properties have been well publicised.”

There is, of course, more at stake than simply impressing the neighbours. Hong Kong offers an investment visa that guarantees people residence if they invest more than HK$6.5 million in the city. The investment must be net - any mortgage money doesn’t count.

In theory, the investment visa is supposed to be off limits to mainland Chinese, unless they have permanent residence in a third country. But in practice, brokers say wealthy mainlanders can still get approved. These home seekers are looking to live permanently in Hong Kong, and are attracted by the high standard of living, transparent taxation and quality education system.

As of the end of August this year, the government had approved 2,730 people for the programme. That includes 1,842 Chinese nationals with overseas residence. They had collectively invested HK$19.4 billion. Of that, more than a quarter, HK$5.4 billion, went into real estate.

“Because of the fluctuation of the China and Hong Kong stock markets, and the rising Hong Kong properties market, immigrants from mainland China come to buy Hong Kong properties instead of Hong Kong stock or other equities,” Yeung at Century 21 says.

All mainland Chinese can also apply for the Quality Migrant Admission Scheme, aimed at luring the best and the brightest to come to Hong Kong. The richest are welcome, too. Although investment isn’t required, Yeung believes they will normally buy property in Hong Kong and notes 1,214 applications had been received by the end of last year.

One common denominator, whether the mainland buyers are speculators or investors, is that they are most attracted to primary sales, from developers. Forget location, location, location – the property has to be new, new, new.

“It is easier for them,” Lau at Midland says. “They only have limited time in Hong Kong and cannot stay for too long. So it will be difficult for them to arrange visits to apartments in the secondary market. With a new property, after they see the show flat, they can always negotiate with the developer on site.”

The prices are pretty much set at new developments too, meaning there is less negotiation than with a secondary sale, and no previous transactions to scour over.

Although there was a wave of mainland buyers in 2007, and a particularly strong surge at the start of 2008, interest has slowed since the spring. There are various reasons behind the change. Most obviously, Chinese stocks went off a cliff after reaching their peak last October, with the Shanghai Composite Index down 58 percent for 2008, through early September. The abrupt reversal has removed much of the ‘hot money’ that was looking for a place to go.

That said, Chow does not believe the stock market downturn effects the investors who are spending HK$10 million or more on a property, who tend to be very wealthy industrialists and company owners.

“The stock market mainly affected salary earners,” Chow says. “The people buying investment property in Hong Kong are not third-class speculators in the market. They are all rich enough to pay HK$10 million or even HK$100 million. The speculation in the stock market is not affecting them that much.”

Learn about living in Hong Kong