Hong Kong's Real Estate Market Gets Worse

SARS is hitting property prices, and there's no upturn in sight

After a six-year slide in property prices, the Hong Kong real estate market requires extra hustle. So when the tony seaside development Aegean Coast opened last October, managers held bashes with free beer and bands every weekend to get potential buyers into the 1,600-apartment complex. That worked well enough. As many as 50,000 people would show up some weekends, and by March, the company had sold more than 1,000 units.

Then came SARS. Few Hong Kongers wanted to venture out, so Sun Hung Kai Properties Ltd., the developer of Aegean Coast, called off the weekend parties. Sales ground to a halt. "People were afraid of crowded places, and I didn't want to be responsible for creating a crowd," says Eric K.Y. Chow, general manager of Sun Hung Kai's sales subsidiary.

Just when developers thought they had hit bottom, severe acute respiratory syndrome has left the battered Hong Kong property market in even worse shape. For decades, property was the engine that drove the Hong Kong economy. But since peaking in 1997, residential property prices have fallen by 65%, one of the biggest real estate busts ever. That includes a 6% drop this year. The long slide has knocked $100 billion off the market capitalization of Hong Kong's listed property companies, some of which trade at less than 10% of their price six years ago. "SARS just adds frost to the snow," says Ronnie C. Chan, chairman of Hang Lung Development Co.

Even though the worst of the SARS epidemic appears to be over, the real estate sector looks likely to spend many more months in intensive care. Six years of declining property values have created persistent deflation, which is hard to reverse. Worse, over the past two years, occupancy rates in top-grade office space have been falling, which forces rents down. And despite the price meltdown, Hong Kong still isn't cheap. Office rents are about the same as Beijing and Shanghai, but shops and apartments are more expensive. In fact, quality apartments in Hong Kong still cost more than in London or New York.

Hong Kong's currency situation could also complicate any recovery. Because the Hong Kong dollar is pegged to the U.S. greenback, interest rates in the territory follow those set by the U.S. Fed. Since a quarter of all mortgage holders in Hong Kong already owe more than their apartments are worth -- and most home loans have floating rates -- sharply higher mortgage payments might force many to mail their keys to the bank.

Moreover, developers have continued to build, creating a glut of new space. Hong Kong's tallest building, an 88-story spire towering over the city's majestic harbor, will open later this year. Developers say they're confident they'll be able to lease the space, but industry insiders say tenants for the building are scarce. Goldman, Sachs & Co. predicts the project will push the vacancy rate in Hong Kong's Central District to 16% from the current 10%. And in the residential market, some 60,000 new units -- a three-year supply of apartments -- will be ready this year and next. With so much extra space, real estate prices will fall another 25% by the end of 2004, says Goldman analyst Chuk-kwan Ting.

Too much space and too little interest have developers scrambling to find more creative ways to attract buyers. Ronnie Chan, for instance, predicts that the breathtaking vistas from his 75-story Harbour View complex will appeal to tenants. And with no more beer bashes to fuel sales, Sun Hung Kai is subsidizing a two-year, payment-free grace period on mortgages at its Park Central complex in Tseung Kwan O, a new town east of central Kowloon.

The relentless decline in prices is shaking up the market. There has been a flurry of asset restructurings in recent months. Billionaire tycoon Robert Kuok, for instance, is trying to take his Kerry Properties Ltd. unit private. He is, however, facing stiff resistance from shareholders, who are angry that he offered just over half the price that the company fetched in its initial public offering in 1996. Still, the property companies are not heavily leveraged and no major case of insolvency seems imminent.

Developers disagree with the dire assessments and are even predicting that, post-SARS, the market will get better. Hong Kong's population continues to swell, thanks mostly to migrants from the mainland, and those people will need to live somewhere. Apartment prices and office rents today stand about where they did in the mid-to-late 1980s, so Hong Kong looks increasingly attractive compared with its regional rivals. "For sure, prices have hit bottom," says Robert Ng, chairman of Sino Land Co. Ng notes that Sino sold about 40 units during the first week of May, vs. almost none in all of April. "Hong Kong is like a tremendously hard ball," Ng says. "It bounces up higher than most people expect." He might be right. But that bounce looks like it's going to be some time in coming.

By Mark L. Clifford in Hong Kong

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