The UK has seen its first interest rate hike since July 2007. The rate has been increased from 0.25% to 0.5% following the Monetary Policy Committee’s (MPC) 7-2 vote in favour of the rate hike. The MPC has justified this rate increase – the first in 10 years – by highlighting that unemployment sits at a record low, consumer confidence is high and global economic growth is on the increase. Mark Carney, Governor of the Bank of England, made the announcement a short while ago. From a real estate perspective the cost of borrowing will increase, and this will be the first time many homeowners and consumers will experience the impact of what the rate rise actually means for them. As an example a GBP 500,000 mortgage, may cost an extra GBP 100 per month. Mortgages, credit cards, personal loans will see interest rates increase. The interest rate rise sets a tone for further possible rises in the coming year, which could take the rate to 0.75% and 1% respectively. The rate increase had been widely anticipated. The infographic chart from the Bank of England and courtesy of the BBC tells the story of UK Interest Rates since 2000 when they stood at 6%. For residential and commercial real estate investors it makes for interesting times ahead. Ultimately interest rates still sit a record-low levels.
Following initial reports last month, The Center, an iconic skyscraper in Hong Kong’s Central district, has been sold for HKD 40.2bn (approx. USD 5.15bn). The stunning 80- storey office tower has 1.2m+ sqft of office space, 13,000 sqft of retail and 400+ parking spaces. The building sees Hong Kong’s richest man, Li Ka Shing, continue to divest some of his core real estate holdings. The price for the building equates to c. HKD 33,000 per sqft (or around USD 45,850 per sqm), making it Asia’s largest single en-bloc transaction. The building has been acquired by CHMT Peaceful Development Asia Property Ltd, incorporated in the BVI, which is consortium led by Hong Kong businessmen in conjunction with a key mainland Chinese company.
While China continues its crackdown on outbound overseas investment, especially in the real estate and entertainment sectors, there is still strong demand from mainland Chinese investors to get a slice of the Hong Kong market. However, while occasional headline deals are being done, the crackdown has created uncertainty and has resulted in many mainland Chinese groups withholding their interest from certain en-bloc or development transactions.
Hong Kong continues to be an attractive market despite its high pricing. While yields may be tight, it remains one of the worlds most hotly contested real estate markets, acting as both a conduit for outbound and inbound capital across the region and globally.
The 2nd Belt and Road Summit in Hong Kong took place yesterday (11th Sep), with the attendance of over 3,200 delegates from around the world all eager to learn more about the role each can play and the outbound and inbound investment opportunities for their respective countries and sectors.
Shaman Chellaram with CRECCHKI – Belt & Road Summit Hong Kong 2017
Many of you may have heard the term Belt and Road, but some may still not be clear on what it is really about. Essentially “Belt and Road” is a policy-driven initiative by China’s President Xi Jinping. It looks to connect over 60+ countries along the old Silk Road and further field by stimulating investment in infrastructure, water, power, logistics, real estate and technology into these markets, with an ultimate goal of connecting people. While ASEAN has had a similar ongoing initiative, Belt and Road has acted as further stimulus for investment focus and provides and platform / framework to move forward. With this in mind, many of China’s SOEs (State Owned Enterprises) and some private companies have embarked on major road, rail and port infrastructure projects across the ‘Belt and Road’ whether in ASEAN countries, Africa, Eastern Europe or beyond.
The Summit, organised by the HK TDC, was largely about Hong Kong’s role in connecting businesses, Governments, investors with public and private opportunities. So what does all of this mean for real estate investors?
Ultimately, with the ASEAN region growing fast and as other ‘Belt and Road’ markets open up we will see the need for housing, education, logistics, offices, hotels, retail (online and offline) growing. All of this represents opportunities for real estate investors, hoteliers and developers, depending on which end of the risk curve you want to be at, and whether you are a long term or short term investor. There is no doubt that if you follow where the infrastructure will be built, other real estate needs will follow. If you look at the key cities and resort areas in these markets other opportunities will become apparent. A few key take-away messages for our investors:
1) Not all markets are equal – especially in the ASEAN region. Take your time to get to know each country of interest whether it be Indonesia, Myanmar, Philippines, Thailand, Cambodia, Laos or others. Learn about the people, the culture, their needs and your WHY for entering a particular market.
2) Conduct your own risk assessment of the markets (political, economic, currency, infrastructure, transparency etc) and spend time on the ground.
3) Find a GOOD local development / contractor partner (This cannot be stressed enough!)
4) Be prepared to take the knocks along the way and be patient.
5) Aim to do a project which really adds value to society, the country, and creates local jobs, as well as being financially viable and sustainable.
6) Become a friend of the nation and the people, rather than muscling your way in. PPP – Public / Private Partnerships may be the way to go for some opportunities, while others will be purely private.
Another element for Belt and Road is that it in itself may be become a virtual economy in its own right in the longer term. With this regard, online retailers will be eyeing this space, as while this is a tech play, infrastructure and logistics investment is of high importance for the delivery of goods.
For any of international clients or investors looking at the ASEAN markets, you are welcome to reach out to me at Evantis Group (www.evantisgroup.com).
When it comes to Hong Kong’s residential real estate market there is definitely a Tale of Two Markets – the First-Hand Residential Sales Market vs. the Second-Hand Sales Market. For those of you not familiar with the terms, First-Hand market is the new development / off-plan market, and the Second-Hand market is the resale market.
If you follow the hype in the news, the First-Hand Residential Sales market is moving fast in 2017. Developers are launching development after development of new projects with small apartments and nano flats (150 sqft – 350sqft), with pricing anywhere from HKD 12,000 psf to HKD 30,000 psf+ in the main sectors. Thousands of people are queuing to register interest and buy the apartments. This market is buoyant because: 1) Demand in HK exceeds Supply 2) The total lump sum (HKD 3m-HKD 12m), while high, is by Hong Kong standards, somewhat slightly more attainable 3) For properties under HKD 5m buyers can still get a decent mortgage 4) For those properties priced higher, some developers are offering top-up mortgages / developer financing so as to reduce the downpayment requirement from the buyers and off-set the HKMA Mortgage caps. 5) Interest rates remain very low.
Let’s switch to the Second-Hand market where transactions are slow. This market is pretty stagnant. Why you ask? Well, prices are high and many owners have no reason or real incentive to sell. If they do, it will be hard to buy back something similar at the the moment. However, the reasons go slightly deeper. For example, to buy a HKD 10m apartment in the Second-Hand market a buyer may need well over HKD 5m (50%) in downpayment alone plus costs to complete the purchase, due to the tight mortgage cap rules in HK. For the equivalent property in a new development, including development finance, the buyer may only have to put HKD 2m. So the crowds will migrate to the market they can afford. The Government’s regulations have really created a two-tier property market with their mortgage cap regulations and their Stamp Duty regulations. Say for example you’re a young couple with your own home, and now you want to upgrade for all the right reasons (have a family, have more space etc etc). If you buy another property, you have 6-12 months to resell your current home, or risk facing the higher rate of stamp duty for owning 2 properties (which can be up to 15% for permanent resident or up to 30% for a non-permanent resident). If you buy a new development property you are coming into where demand is strongest (in certain sectors) and while paying a high price on a psf (per square foot) basis you may only need to put down 20% (including mortgage and developer finance) but at the same time you have sell your second-hand property in a market where your buyer pool is limited to 50% mortgage. So it’s not an even playing field. While the HK market is fairly liquid, as you approach your stamp duty deadline, you could be forced to take a hit on your property sales price just to avoid paying the higher rate of Stamp Duty. The HK Government is looking into this as to how to extend this timeframe for people who genuinely wish to move/upgrade home, but it does present a market problem, or perhaps a market opportunity.
Either way, Hong Kong’s residential market is a Tale of Two Markets at the moment, and to the majority of the population, the prices are too high to actually jump on the ladder. Affordability remains a key issues. But those who watch closely will definitely find pockets of opportunities.
The co-working and flexible-office space market in Asia is heating up. WeWork, NakedHub and URWork are all busy making deals, raising funds, expanding and vying for market presence and market share.
WeWork is expanding rapidly with $500m of funding to be used for Korea and the SE Asian region. It recently acquired Singapore’s Spacemob. WeWork, with over 130,000 members, now has a presence in over 160 locations across 15 countries across the globe.
Other players in the market such as NakedHub are also expanding rapidly. The group’s recent merger with Singapore’s JustGroup creates a 41-centre platform with over 140,000 sqm under management, and with the ability for further expansion across Asia. It has a significant presence in China and new centres in Hong Kong and Vietnam.
URWork – the Beijing-based startup – now has around 100 centres around China with a valuation of around USD 1.3bn, It plans further expansion into Singapore and key overseas markets. It just announced a further raise of around USD 170m to fund this international expansion with funding providing from Beijing Capital Land and Shanghai-based Prosperity Holdings.
Investors from across the region – including developers, VCs and PE funds – are all playing in the space, with each providing funding to the various groups.
Keep watching this sector, as there is sure to be further activity in the form of JVs and acquisitions.
Lee Kum Kee Group – an HK company famous for its range of sauces – has moved to acquire London’s ‘Walkie-Talkie’ commercial office building for approx. GBP 1.3bn via its real estate arm. The deal sees the acquisition of the 37-storey 688,000 sqft building of which 671,000 sqft is dedicated to office space and the balance to retail. The building, built in 2014 by Landsec and Canary Wharf, also has a stunning Sky Garden. The building’s selling price puts it at the top of commercial real estate deals in London, surpassing the GBP 1.1bn paid by QIA (Qatar Investment Authority) for the HSBC Tower at 8 Canada Square a few years ago.
This is the LKK Group’s second recent acquisition in London having acquired 3 Harbour Exchange for GBP 37m in December last year.
The deal shows the continued demand from Asian investors for London commercial real estate. While the Mainland continues to monitor spending from some PRC investors, HK investors remain very strong in the London market. Having digested the news surrounding Brexit last year, the pound’s subsequent weakness coupled with the UK’s transparent legal system and the search for steady yields, continue to attract international investors to the UK’s capital.
The Hong Kong first hand residential sales market has had a buoyant year. Developers have been selling their projects quickly, especially in the lower-to-mid-market price range (HKD 4m-15m). By most international standards this is still considered pricey considering the size of homes in this price bracket can range from just 150-160 sqft to 400 sqft+ in size! Most developments in this price range have tended to be over-subscribed. Affordability for the average Hong Konger is not there, but at the same time, most buyers do not want to miss the opportunity to buy in.
However, according to local reports in recent weeks the market has seen a few buyers forfeit their deposits on new off-plan properties rather than continue with the purchase. We are only talking a small number, and this is obviously the exception and not the rule, as Hong Kong’s demand for property continues to outstrip supply. Whatever the actual reasons, it is perhaps a little warning sign to those buyers who may be jumping in head first, and not sure how they may manage to complete their purchase. The HK market and stamp duty regulations make it near on impossible to flip a property, and so most buyers of new off-plan properties need to be aware of these issues and understand their affordability before they even decide to pay the deposit. Many HK investors are seasoned real estate investors, but one or two will get caught out. With youngsters also needing to get on the real estate ladder, it does pose a real problem for HK.
The second hand resale market in HK remains sluggish due to the extremely high down- payment requirement of 40%-60%, with only the balance being able to be financed via a mortgage. So unless your sitting on a few million HKD in spare cash or savings, you’re not likely to be able to afford to buy a home. The first-hand new development market continues to be the beneficiary of this and attract the interest of those looking to own a home. Downpayment requirements are less and some developers will offer buyers a top-up mortgage to reach the 80%+ region.
The main advice to our clients is to understand your affordability, irrespective of what the market is doing.
With key headlines in the last few weeks with regards major Chinese developers & conglomerates having their wrists slapped by the Chinese government for their overseas acquisitions, what does this mean for outbound capital?
We have seen in recent days and weeks the likes of Wanda, HNA, Anbang Insurance and other Chinese companies come under increasing scrutiny and regulatory pressure. In some cases access to funding has been curtailed with restrictions on what can be done with certain overseas assets and with their banks being given specific instructions to stop funding these transactions. In short, certain groups may re-focus their investment strategy more within their own boundaries and also in Hong Kong. We will also see companies following President Xi’s Belt and Road initiatives continuing to do business, especially for the SOEs with specific mandates.
Chinese outbound investment into sports, property, entertainment and some other sectors may be affected. While we will see those deals with Chinese regulatory approval continue to go abroad, the scrutiny the overseas deals attract may dissuade other Chinese investors from wanting to do the same. The next 6-12 months will be in key for this sector, and it will be good to monitor opportunities and real estate prices in some of the key gateway cities which have seen major transactions from Chinese buyers.
The Hong Kong Government yesterday (April 11th) stepped in to close a local stamp duty loophole in a bid to further cool the rising property prices in the residential market. For first-time buyers of residential property in Hong Kong the stamp duty on their “first sales and purchase agreement” was based on the lower rate of stamp duty (typically between 1.5% to 4.25%). First-time buyers were using this existing loophole to buy multiple units under one legal agreement, whilst only paying the lower rate of stamp duty. The HK Government moved to close this loophole, and any first-time buyers buying multiple units will be subject to the higher 15% stamp duty. The measure was effective as of midnight on 11th April, so effectively the 12th April as a working day. How this will curb prices remains to be seen, but in the short term is sure to act as a partial deterrent to people buying multiple units. Whether this helps local first time buyers looking for their first home remains to be seen. The Hong Kong market still has a strong demand dynamic which is not met by the current housing supply. That coupled with a low interest rate environment continues to keep the first-hand residential market busy. Hong Kong continues to be the world’s most expensive real estate market, far outpacing London, New York and Sydney.
The Manhattan luxury housing market had a rebound in early March, with increased numbers of transactions for properties at USD 10m and over. There have been strong signs over the last few months that NYC’s luxury market had lost steam. However, recent activity has suggested that buyers are ready to step in to the market if they feel there is ‘good’ deal. In a number of the top luxury projects, luxury units have been snapped up with significant discounts of anywhere from 5 to 20%+. Part of this can be attributed to sellers perhaps being more realistic in their expectations coupled with an over-supply in the luxury condo market. Examples include the sale of a luxury 4,483 sqft condo at One57 which sold for USD 24.95m versus its asking price back in 2015 of USD 35m.
The Manhattan market continues to be of interest to international buyers, and there are some very interesting opportunities. If any of our clients are interested to know more, please do not hesitate to reach out to us.