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Lust for Lux

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How demand for top end property in Hong Kong shows no sign of slowing down

Words by Alex Frew McMillan

At the peak of the Peak, property prices are more expensive than anywhere else in the world. Severn Road, which winds around Mount Gough just below Peak Road, is now the most expensive residential street on the planet. It usurps a position previously held by Avenue Princesse Grace in Monte Carlo, according to an annual survey of the world’s most expensive postcodes by Financial News. So what exactly is propelling Hong Kong’s luxury market?

The swap indicates the shift in power from west to east – Severn Road was ranked eighth in last year’s ranking. But US$70,000 (HK$546,000) now buys just one square metre on the exclusive street. That’s HK$50,725 per square foot. Its prices have raced ahead 72% in a year, according to the ranking, more than making up for any dip during the financial crisis.

By contrast, real estate in Monaco was down 45% over the past year, knocking Avenue Princesse Grace to fourth spot, at US$64,000 per square metre. It’s just behind Kensington Place Gardens in London and Fifth Avenue in New York, both tied for second at US$65,000 per square metre. The price in London was flat over the last 12 months, and Fifth Avenue fell 10%. On average prices of the world’s most-expensive streets fell 15% in the last year.

The rapid price gains at the top of the market leave some property professionals nervous that Hong Kong is again getting ahead of itself. The world “bubble” may not be on everyone’s lips yet, but it’s in the back of their mind.

If it goes up this way for another half year, I think the market will be in trouble,” John Au-yueng, a broker with Fidelity Real Estate, says. “I think people are becoming a little bit irrational now.

Though the Peak is now rivaled by upstarts such as Repulse Bay and Stanley – “the Southside,” in realtor-speak – it of course has a special place in Hong Kong’s property mythology. What happens up above the clouds doesn’t necessarily spill down the mountain to Hong Kong’s rank and file.

But it does grab headlines. In late July, a luxury site at 103 Mount Nicholson Road sold to Nan Fung Group and Wharf Holdings for HK$10.4 billion, an accommodation value of HK$32,014 per square foot. The developer plans on building 12- or 13-storey apartment buildings as well as 18 to 25 homes. It’s thought the houses could fetch HK$48,000 per square foot, with the apartments selling for around HK$40,000.

The results of the auction were in line with market expectations. But the sale reinforces the solidity of the market, especially when combined with the results of the previous land sale, a lot in Ho Man Tin, Kowloon. That sold for HK$10.9 billion to Sun Hung Kai Properties, or HK$12,540 per square foot, very close to the price of properties changing hands in the area in the secondary market.

Sun Hung Kai Properties is also involved in one of the most high-profile property launches this summer. It’s part of a consortium that also includes Kerry Properties and Paliburg Holdings that has unveiled the Larvotto, a 715-apartment development on Ap Lei Chau that is commanding around HK$18,000 per square foot for its relatively large apartments. Units of just under 2,000 square foot gross, or net area of just under 1,600 square feet, are fetching HK$34 million. The developer raised average prices by 6% from the first price list it put out to the third.

The Larvotto is essentially a multi-block apartment development in typical Hong Kong style, like nearby Bel-Air in Cyberport. Though the apartments are obviously mass produced, the developers have positioned it as a “luxury” development, more or less successfully.

There was some controversy over the layout of the Larvotto, with brokers saying the developer had given them instructions on how buyers could convert the three-bedroom units into four-bedroom units. But that would have left the fourth bedroom without a window that opens to the outside, which is against Hong Kong’s building codes.

Sun Hung Kai then introduced a training video two weeks before the flats went on sale, making it clear what was permissible. “Sun Hung Kai would not encourage them to convert them to four bedrooms,” spokeswoman Karen Wong says. “I think some of the brokers overpromised [prospective] buyers.”

The Larvotto is one of the first developments to go on sale after the government introduced new rules on first-hand apartment sales, which went into effect on June 1. The developer now has to provide a price list ahead of the property launch. They are also required by law to display an “unmodified” showroom flat, in hand-over condition – although for the Larvotto, it was in a totally different location, the International Finance Centre.

The prices at the Larvotto are above the average transactions for luxury residential sales in the second quarter of the year, as tracked by the brokerage Colliers International. Average luxury prices rose 4.5% over the first quarter, to HK$16,783. Rents are also rising, up 4.7% to HK$41 per square foot per month.

A little lower down the scale, Sino Land saw good success with The Hermitage development in the previously unfashionable neighbourhood of Tai Kok Tsui. The 964-apartment development has been selling at around HK$11,000 per square foot. Another new project in Tai Kok Tsui, the Sun Hung Kai Properties development Lime Stardom, sold 94% of its 377 mainly smaller units in its launch, at an average of HK$8,044 per square foot, with only a few penthouse units left.

It was prices that roared back particularly fast after their correction in the credit crunch. But rents are now starting to outstrip prices, as they typically do when property gains start to slow. Colliers expects luxury prices to rise 10% over the next 12 months, with rents rising 15%.

Although prices at the very top of Hong Kong’s market seem to have a life of their own, mass-market gains have not yet got out of control, market watchers say. Given the extremely low interest rates, affordability is still decent – though of course Hong Kong hardly ever seems cheap.

The average price for an apartment in the secondary market in the 100 most-popular housing estates is HK$4,662 in 2010, according to mReferral Mortgage Brokerage Services, compared with HK$6,208 in 1997.

“In terms of price, it is not really crazy. It is average,” Sharmaine Lau, mReferral’s chief economic analyst, says. “If you’re talking about the high-end market it can be really outrageous. But that’s less than 10% of the market.”

Buggle Lau, the chief analyst at the brokerage Midland Realty, says there seems to be plenty of confidence in Hong Kong’s market. Mainland Chinese, although hurt by austerity measures across the border, still seem interested in buying in the city, too.

If speculators’ demand increases all of a sudden, that will propel the price to increase, and that will develop into a bubble,” Lau says. But for now, Midland believes most speculators could complete on their purchases and rent them if they had to. “At this point we still believe the market is relatively healthy,” Lau said.

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