June 1, 2007

HK's appetite for property nowhere near 1997 peak

HONG KONG - CHASTENED by a slump, Hong Kong's craze for property investment has abated over the past decade, leaving a 1990s-style speculative boom unlikely, despite efforts by powerful developers to engineer one.

Ten years after Britain returned the colony to Chinese rule, the city has emerged as the main conduit for investment into the mainland's thriving property industry.

'Hong Kong was too small before 1997,' said Mr K.K.Fung, the Hong Kong managing director of property services firm Jones Lang LaSalle (JLL). 'We all knew that if we didn't look outside, into China, we'd have very restricted growth.'

China attracted US$9 billion (S$13.8 billion) in cross-border investment last year, up 69 per cent from 2005, while Hong Kong drew US$6.9 billion, down 33 per cent, said JLL.

The 1997 handover coincided with the Asian economic crisis. That was followed by the bursting of the dot.com bubble and an outbreak of the Sars respiratory disease. Property prices slumped 70 per cent in the six years to mid-2003.

Prices have since recovered - luxury flats are back at 1997 levels.

But average apartment prices are still half the level of their peak, prompting UBS analyst Eric Wong to predict another 30 per cent price rise this year because salaries are higher than a decade ago and interest rates are much lower.

However, rising interest rates slowed transactions to fewer than 100,000 last year, compared with around 125,000 in 2005 and almost double that in 1997.

A University of Hong Kong home price index was up just 3.3 per cent in April from a year earlier.

'The richer got a lot richer, and middle-income families have been left behind,' said Mr Kenny Tse, a Morgan Stanley property analyst for 10 years who has joined Aetos Capital Asia as managing director and head of China real estate.

'We've got liquidity, tight supply, but demand is weaker.'

Developers are trying to drum up speculation with deals where a buyer puts down a fraction of the cost of an apartment when building begins and pays the rest after two years.

Meanwhile, the likes of Sun Hung Kai Properties and Cheung Kong are also storing as many as 20,000 built apartments to keep prices high, analysts say.

But in contrast to Singapore and Japan, Hong Kong's real estate investment trust market has fizzled, with investors believing that landlords were hoodwinking them into paying too high a price for second-grade buildings.