REAL ESTATE: Hong Kong - A Magnet for Chinese Capital


With a record US$5.32 billion of mainland investment into Hong Kong property last year – up from just US$3.31 billion in 2015 – Hong Kong’s real estate market was second only to New York’s as a target for mainland capital in 2016. The inflow of Chinese capital is rapidly transforming the market for development sites and mature assets in the city

By Zac Tang

By the end of this year, Hong Kong may surpass New York as the most favored investment destination among Mainland Chinese developers, corporations and high-net-worth individuals.

In the near term, heavy inflows of Mainland Chinese capital into Hong Kong may moderate, given the stabilization of the RMB in foreign exchange markets. However, over the long run, Chinese investors are in the territory to stay. Both local and Mainland developers will need to adapt to the changing face of Hong Kong real estate.

A changing landscape

When Chinese developers first came to Hong Kong for investment in Hong Kong’s real estate market, they generally teamed up with local partners. In the 1980s and 1990s, for example, CITIC Limited (previously known as CITIC Pacific) and China Overseas Land jointly acquired residential sites with local developers.

Over the last 20 years, Mainland developers have grown in terms of their size and scale so remarkably that they can invest on their own without a local partnership or joint venture. Companies like China Vanke, China Overseas, Poly Property, and HNA have all been very successful in their recent bids for land in Hong Kong. In February 2017, two lesser known Chinese developers, Logan Property and KWG Property, surprised the market by winning a bid for a residential site in Ap Lei Chau Island, paying a record HK$16.86 billion (US$2.17 billion) for the site near Hong Kong’s newly-opened South Island metro line.

Recent market transactions

While Chinese investors have snatched up trophy assets in New York, including Chase Manhattan Plaza and the Waldorf Astoria, high-profile assets in Hong Kong’s Central district are generally not for sale. With local developers determined to hang onto their landmarks in Central, Mainland investors have ventured further east into the district of Wanchai. Two of the record-setting en bloc purchases in the area include Evergrande’s HK$12.5 billion purchase of the Mass Mutual Tower in 2015 and Everbright’s HK$10 billion acquisition of the Dah Sing Financial Centre in 2016. Mainland buyers have also been active in the market of Kowloon East and other areas outside of Central.

Mainland corporations are also the fastest growing group of office tenants as the number of PRC companies in Hong Kong has increased by double digits between 2012 and 2016 – a key reason for rising office rent and further decentralization of office locations among multinationals and SMEs alike. For instance, JP Morgan Chase has pre-leased multiple floors in Kwun Tong, and AllianceBernstein will move from Central to Quarry Bay.

Chinese buyers are no less influential in the residential sector. In March, HNA bought its fourth plot of land in Kai Tak for HK$7.44 billion, effectively doubling the market price per square foot compared to three years earlier.

With demand continuing and prices still on the rise, mainland investors and MNC occupiers should explore opportunities in the decentralized areas. With more affordable prices in Kowloon and the New Territories, there is greater potential for upside as these locations mature. Price growth in core-areas, despite their prestige value, may slow after two years of rapid increases based on previous cycles.

How local developers can adapt

Aggressive pricing strategies adopted by Mainland developers in land tenders have put their Hong Kong counterparts on the defensive. While participation from these mainland giants in the Hong Kong property market could create tension in the short term, both sides are facing the necessity of developing innovative strategies to replenish their depleting land banks.

The local development market is getting crowded with more PRC developers entering Hong Kong, and the share of land sales value won by the top five local developers fell from 23 percent to 8 percent between 2015 and 2016. To maintain a stable stream of future supply of residential units, local developers will need to use a range of different resources rather than reliance on the government land sales program to replenish their land banks.

One option is a long-term investment in agricultural land. Hong Kong’s top four local property developers together have amassed 106 million square feet of agricultural land. The conversion of farm land for residential purposes involves complex planning and negotiations – and local developers are much better positioned to be involved in acquiring agricultural land in Hong Kong.

There are also opportunities for local developers with brownfield sites. The government has been encouraging the transformation of the old industrial cluster in Kowloon West, Kowloon East and Island South where industrial activities have decreased drastically.

Chinese investment is here to stay, and local developers need to adapt by weaning off reliance on government land alone. A consortium with medium-sized Mainland developers can be beneficial in the long run because expertise and knowledge of the local market are critical to the success of PRC developers; in return, Hong Kong developers can be more effective in penetrating the market of Mainland China.

Zac Tang is Senior Research Analyst at Colliers International. He produces thought-leadership content on the latest movement and policy changes in the commercial, industrial and residential sectors. He also provides analysis on occupier and investment markets in Hong Kong.