Beyong The Capital Investment Entrant SchemeWhat a difference a few years makes. Even though SARS is firmly in the rear view mirror, its impact will not soon be forgotten. The days of empty movie theatres, suspicion-laden bus rides and an echoing airport terminal have been ingrained in the public mind, and no one wants a repeat. Things were so bad the economy took a serious blow and the government had to come up with something to lure business back to the city. It came up with the Capital Investment Entrant Scheme, and for the most part, the programme did its job. So well in fact that six months ago the government suspended it, leaving us to wonder what its legacy will be, if it leaves one at all.

Cash Machine
Created post-SARS to give the battered economy a boost, the Capital Investment Entrant Scheme (CIES) was suspended in January 2015 seeming having worked beautifully, for all intents and purposes. As of the end of 2014, over $200 billion had poured into Hong Kong since its implementation. Announcing the suspension, a government spokesperson statement said, “In view of the latest economic situation in Hong Kong, attracting capital investment entrants should no longer be our priority. Instead, our focus should be on attracting talent, professionals and innovative entrepreneurs to contribute to our economy. The Government has therefore decided to suspend the CIES until further notice. This will also help the Immigration Department in clearing the over 12 000 CIES applications under processing.”

Approximately 25 percent of that $200 billion deposit came from real estate investment (depending on which source you cite). During the same period of time, property prices have skyrocketed, but property was removed from the approved investment asset list in 2010. The biggest price leaps have come after the GFC of 2008. Director and Head of Research & Consultancy at Knight Frank Greater China David Ji doesn’t think CIES was the root of the city’s property activity woes at the very least. “Property transactions were slower in the past years, not due mainly to such suspension, but to other market cooling measures,” states Ji. “For example, since the implementation of the Buyer Stamp Duty in October 2012, the proportion of mainland buyers in Hong Kong property sales plunged from 40 percent to 20 percent.”

The scheme semi-officially continued for applicants who had $10 million in permissible investment assets ready to go prior to the January 15 suspension. At the time permissible assets included equities (shares in Hong Kong listed companies), debt securities (including bonds), certificates of deposits (in Hong Kong dollars with certified banks with at least one year remaining), subordinated debt and eligible collective investment schemes, (insurers and funds like Fidelity Global, JPMorgan, Allianz, BEA Union Investment, Manulife, BOC Funds). Ji will admit that the first half of this year, since the suspension, with the impact of the stamp duties now fully absorbed, “We have seen some renewed mainland investment interest in the Hong Kong property market, especially in the luxury residential sector.” In the first half of 2015, eight of the top 10 luxury residential transactions in Hong Kong involved mainland purchasers. Trophy assets on The Peak have little impact on the mass market.

Lasting Effects
Still, the idea that CIES somehow contributed to the SAR’s residential prices spiking at record rates — luxury and mass market sector both — lingers. Whether that is correlation or causation is up for debate, but government is now putting an emphasis on manpower rather than cash to drive the economy in the coming years and in turn the property market. “As we all know, some sectors like housing and property are having too much investment. So what do we need right now? We need talent,” said Chief Executive CY Leung after the CIES suspension. That raises another issue altogether, as the young, modern talent Leung refers to like green grass, blue skies, street-level neighbourhoods and cycling to work — things Hong Kong lacks. But the city doesn’t need CIES now. “Hong Kong is a liberalised market which allows free flow of capital. Investment activities will not be influenced by the new policy,” Bank of China Hong Kong analyst Zhuo Liang told The Standard.

The combination of a shifting policy in the mainland and increased outbound investment by mainland funds and insurers means investment into Hong Kong certainly isn’t going to stop; in fact it’s on the rise. Despite a quiet first quarter on the investment front, a so-called golden visas were not factors, as Hong Kong’s key investors remain institutional. “The decline in investment volume was due to a combination of the first quarter traditionally being a quiet period for the market and also because of the lack of assets available for sale,” said CBRE’s Hong Kong Investment MarketView for the second quarter. “Tradable stock, particularly en-bloc assets, on the market has fallen significantly after the robust investment activity witnessed in recent quarters.” It’s a familiar story: there’s no supply.

“We believe CIES had never been a major factor driving up Hong Kong property prices during the past two years with real estate investment under the CIES representing only about 1 percent of the total value of real estate transactions, according to the government figures,” argues Ji. “The continued rise of Hong Kong housing prices is attributable to the chronic imbalance of supply and demand for flats, regardless of the suspension of the CIES.”