Friday Asia Digest: Cooling Measure Save China, Fail Hong-Kong


The old “China/Hong-Kong love/hate dependency/independency” relationship issue is ringing louder and truer than ever this week, as the state of both countries’ property markets provides observers and analysts with a fascinating opportunity to study the complex relationship between the two.

Both China and Hong-Kong governments have introduced strict and severely limiting cooling measures, in several harsh cycles these past two years – as China’s virginal private ownership real-estate market attracted huge amounts of foreign investment and speculation, blowing prices out of proportion in a country already beset with social resentments and unstable, often outright corrupt policies and regime behavior – whereas Hong-Kong, on the complete opposite side of the scale, widely regarded for several decades as one of the world’s most lucrative, regulated, taxually-attractive (I just made that word up) and promising property markets has, as anticipated, spiraled out of control, quickly becoming the world’s most expensive and un-affordable in the process.

For wholly different reasons, therefore, and with a wholly differing archetype of foreign property investor playing the part of speculator – both traditional, mainland China and its reluctant foreign-educated and rebellious step-daughter, the city-state of Hong-Kong, have ended up in the same position – being forced to artificially intervene in a rapidly heating property market – and with startlingly differing results, if this week’s news reports are an accurate reflection :

Hong-Kong’s Hang Seng Index was down 0.2% last week, as local property developers sharply declined, after the territory’s government introduced a 15% tax on property purchases by foreign buyers. A mere two days later, however, things were looking much better – mainland Chinese shares lifted Hong Kong markets with their best daily performance in nearly a month, boosted by stronger Chinese economic data and a report that more city governments were easing restrictions on the real estate sector. Shanghai-listed Poly Real Estate, among China’s largest developers by sales, jumped 5.6 percent to its highest level since July. The Shanghai property sub-index was a standout outperformer among sectors, rising almost 4 percent. In Hong Kong, meanwhile, traders said some investors were rotating out of Hong Kong developers and into Chinese developers, with the worst seemingly over for the latter and some major Chinese developers reported positive third-quarter earnings. At the same time, some investors expect more policy curbs in Hong Kong could be in store because of greater capital inflows – in short, the measures so far introduced aren’t working, it would seem – Hong Kong’s property market saw is strongest quarterly growth in the second quarter of 2012 since the middle of 2009, as previously reported, and is at an all-time historic, clearly unsustainable high.

This increase in prices in Hong-Kong has been met by further lending restrictions and measures to increase housing supply, including the sale of 830 Home Ownership Scheme (HOS) units early next year, putting 1,000 flats up for sale at a discount under the “My Home Purchase Plan” and speeding up the approval process for pre-sale flats. “The immediate impact however is limited, as only about 1,000 units will be added to the market in the short term”, said Thomas Lam, head of research for Greater China. And while prices in luxury developments remained stable last month, he commented, there have been a number of record transactions in the market, including a unit sold for 55 million USD, which puts it in the zone of the most expensive in the world.

China, and Asia Generally, Regarded as Stable and Promising

The scenario depicted above, in which China’s successful speculation control measures, modest deceleration and future continued growth can help other countries in the region “pull their weight”, as well as regional economy, forward – could be seen out of the Hong-Kong context as well :

Blackstone Group LP, plans to step up real estate investments in Asia after raising more than $13 billion for a property fund. The world’s largest private-equity firm has been among the biggest buyers or property in Australia and India – returns on Blackstone’s commercial real estate investments in India are “in the double digits on an unleveraged basis” in the past year, the company spokesman reports. As the economies of China and India cool, Blackstone is seeking to capitalize on property prices that have fallen from their peaks. China’s move to curb real estate speculation has cooled the market even as the world’s second- largest economy shows signs of improving. Leon Black’s Apollo Global Management LLC (APO), the private-equity firm that is seeking to rebuild its real estate arm, is raising $750 million, as previously reported, for a pair of funds that will focus on commercial properties in Asia.

Certitude Global Investments chief executive, Craig Mowll, as well, was quoted this week saying that he was “surprised by investors’ focus on China not being able to deliver double-digit growth this year, with these investors disregarding the expectations that gross domestic product for the region would double by 2030“. Even with the reduced growth in China this year, Mowll said Asia looked much more appealing than the United States and Europe.

Global Gossip

* Asia Pacific Real Estate Association (APREA) said the REIT structure “has proved remarkably resilient in the face of the global financial crisis, particularly in Asia because of their transparent and liquid characteristics. The global REIT market, the APREA reported, had grown to a capitalization of 568 billion USD, growing by 138 billion last year alone. Much of this growth has been in Asia (excluding Australia). Today, they claim, there are about 144 Asian-based REITs with a market capitalization of approximately 127.7 billion USD. Asian REIT industry is only in its infancy, accounting for 11.5% of global REITs. One of the main reasons to assume a large increase in their market presence is, according to APREA, the fact that a significant portion of real estate in Asia is still held in private hands and weigh heavily on company balance sheets.

* A big week for the Asian hotels and serviced apartments sectors, as CapitaLand’s “Ascott”, has been awarded a contract to manage a 100-unit serviced residence in Ho Chi Minh City, Vietnam. Ascott will also manage Vista Residences, a 168-unit property within The Vista, as the company further consolidates its position as the largest international serviced residence owner-operator in Vietnam, with over 1,600 apartment units in 11 properties across four cities. Marriott International, as well, announced that it expects to more than double the size of its portfolio in the Asia-Pacific region in the next few years. With 132 hotels open in Asia today and a pipeline of signed and approved deals now totaling an additional 143 properties, the company expects to grow to at least 265 hotels by 2016, with more than 80,000 rooms in 16 countries. “While China and India are the driving forces for our business in Asia,” the company spokesman said, “we are also seeing growth with new signings and openings in Indonesia, Japan, Malaysia, Vietnam and elsewhere in the region”.

* The Chinese government, through its investment arms, has been purchasing in Paris (pictured on right), adding to ever increasing ownership of other global metropolises such as London, New-York city and Los-Angeles, as previously reported and further expanded last week. China’s Investment Corporation (CIC) is eyeing investment opportunities in the high-end property market in Paris as it seeks higher yields than those from traditional financial assets. From zero presence in 2011, China has grown into the second-biggest foreign investor in the property market in the French capital. The value of Chinese investment in Paris accounted for nearly 15 percent of the total foreign property investment made in the first three quarters of this year, after Qatar’s 30 percent, according to a new report by JLL France.

(Partial list of sources – “The Wall Street Journal“, “Reuters“, “Property Wire“, “Money Management“, “The Star, Malaysia“, “eTravel Blackboard“, “Hotel News Resource“, “Bloomberg Business Week“, “The Morning Whistle, China“)

(Pic 1 – China & Hong-Kong flags / Dimitry B, Pic 2 – Paris / Moyan Brenn)

About Author

Ziv Magen

Ziv Magen (G+) is an Australian, and has been living alternately in Japan and Australia for the past decade. "Born and bred" an IT project manager, he has made the transition to full-time real-estate investing several years ago, and subsequently opened a buyers' and proxy agency - assisting others in remotely capitalising on Asia's booming property market.

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