Even In Hong Kong, What Goes Up...

Some of Hong Kong's biggest property moguls crowded into Kowloon's Cultural Center on Jan. 25 to attend the first government land auction of the year. Only one problem--they didn't show much interest in buying land. Of three sites offered, one was withdrawn after attracting no bids, another went to a small-time player who was the sole bidder, and the third sold for just $22 million, well below the $25 million the government hoped for.

Only a year ago, Hong Kong was the world's hottest real estate market. Today, it has lost its luster. Rising U.S. interest rates, a falling stock market at home, and uncertainty in China have conspired to hit the colony's residential and commercial sectors. Tumbling prices and rents are a rude shock to property tycoons used to booms, and no relief is in sight.

The residential market is hardest hit. Sales prices have dropped nearly a third from the highs set last spring. Luxury apartments in the Mid-Levels section of Hong Kong Island go for $1,400 per square foot, down 8% from last year. Commercial rents are also suffering, falling some 10% in the Central District since November.

MISSING CASH. Hong Kong's ailing property markets are also undermining its slumping stock market. Developers make up 30% of the Hang Seng index. Another 30% is composed of conglomerates with major real estate holdings. Banks with big mortgage portfolios make up much of the rest.

The bear market is hurting some of Hong Kong's biggest names. In early January, Li Ka-shing's Cheung Kong Holdings Ltd. put 128 units of its new Laguna City development on the market. The company had been predicting the sale would be oversubscribed by 400%. But it received only 100 applications--even though the offering prices were 9% lower than similar apartments offered last September. While the volatility is mostly in the residential sector, analysts expect the commercial sector to follow suit. Credit Lyonnais analyst Trevor Cheung predicts a fall of up to 30%.

And a new factor is unsettling markets: political jitters. Until recently, the property markets had largely ignored the battle of words between London and Beijing over the 1997 succession. But with less than 30 months to go before Beijing takes over, there's more concern about China--especially with Deng Xiaoping reportedly on his deathbed. Moreover, Chinese investment in Hong Kong has dropped sharply, because state enterprises hovering near bankruptcy have much less cash for speculation.

The picture won't get much better for the land companies in the next few years, thanks to a glut of new commercial buildings. In 1996 alone, some 5 million square feet of new grade-A office space will come on the market. So much new space is coming online that many tenants are taking short leases. That means paying rents of as much as $156 a square foot per year--compared with $33.60 in Manhattan and $54 in Singapore--but such tenants will be able to move when prices fall. NBC Asia, which plans to start broadcasting in April, took a two-year lease earlier this winter. "Our hope is that there'll be further slippage in commercial rents by 1996," says Leonard Pratt, NBC Asia's director of network development.

Hard times for property moguls are not that unwelcome to some in Hong Kong. Governor Chris Patten's government, worried about Hong Kong's competitiveness, took steps last spring to push prices down, such as banning the resale of residential units still under construction--virtually ending a rash of speculative buying. The measures will stay in place for a while, since the government would like home prices to fall 10% more.

The news is not all bleak for Hong Kong's land companies. The decline in prices may lure back foreigners scared off by the colony's reputation as the world's most expensive market. "We still believe there is more demand than supply in both residential and commercial property," says Lily Yau, senior property manager at Midland Realty International, one of Hong Kong's largest realtors.

Even so, the slump has created a new attitude. The punters who reveled in flipping properties have not only suffered monetary losses, says Credit Lyonnais' Cheung. "For years, there was a mind-set that you can't lose betting on Hong Kong." To their dismay, the colony's property speculators have learned that they can't win all the time.

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