Property Markets

1
Property Markets

• HONG KONG

2
Hong Kong Property Market

• Influence of Government
• Leasehold land tenure system
• Principal generator of land supply
• Disposals application list system
• Lease modifications
• Agencies URA, MTRC, KCRC
• Dependence on land revenues
• Major owner and until recently provider of social
  housing

3
A More Predictable Property Market?

• Shift from trading to investment mentality
• More comprehensive long term approach to planning
  and land use
• Land supply driven policy
• Non intervention by Administration
• Re-think of housing policy
• Market largely driven by fundamentals

4
Market Overview - Residential

• Ultimate barometer of Hong Kongs well being
• In recovery mode but is it sustainable?
• Three markets within a market plus public housing
  sector
• Potential issues relating to supply in 2006-2007
• Vulnerability to increases in interest rates
• Speculation at top end

5
Hong Kong Home Ownership private sector

• Traditionally builds 25,000 35,000 units per
  annum
• Land obtained through purchase / lease
  modification
• In lead up to 1997 prices driven by speculative
  attitude and opportunity to make quick profit,
  not aspiration to own ones home
• Post 1997 market collapse values fell by some
  65. Most families in negative equity
• Correction lasted for best part of 6 years, now
  seeing market revival driven by fundamentals

6
Total Stock of Private Residential Units by Class
in Hong Kong
Class D (53,646 units)
Class E (24,112 units)
Class C (110,624 units)
Class A (361,243)units)
Class B (501,137 units)
Classification of Residential Units by Class
Class A - saleable area less than 40m²
Class B - saleable area of 40m² to 69.9m²
Class C - saleable area of 70m² to 99.9m²
Class D - saleable area of 100m² to
159.9m² Class E - saleable area of 160m² and
above
Sources Rating and Valuation Department
7
Hong Kong Residential Market (Overall) Supply,
Take-up Vacancy
Sources Rating and Valuation Department, HKSAR
Insignia Brooke
8
Hong Kong Residential Market Annual Price Indices
(1999 100)
Sources Rating and Valuation Department, HKSAR
Insignia Brooke
9
Hong Kong Residential Market Annual Rental
Indices (1999 100)
Sources Rating and Valuation Department, HKSAR
Insignia Brooke
10
The Leighton Hill, Happy Valley
11
Housing the Community

• The role of Government
• Stabilising society
• Facilitation
• Financial support
• Social need
• The role of the private sector
• Responding to market demand
• Assisting Government with physical provision

12
Hong Kong Home Ownership Public Sector

• HA provided 649,000 pr flats for 2,019,000
  persons representing 30 of Hong Kongs
  population
• Sold 405,500 flats through various subsidised
  home ownership schemes
• Provided over 100,000 loans for flat purchasers
• Built 2.26M sq m of commercial/retail space and
  100,000 car parking spaces

13
Hong Kong Government Housing in 1970
14
Hong Kong Wind of Change (I)

• HA supply intended to complement / augment
  private sector but at times of high unaffordable
  prices HA became prime producer and competitor of
  private sector
• Up to 100,000 units per annum at peak. Sold at
  discount from market value, quality good
• Collapse of property market. Private sector now
  affordable. Rebellion by private sector
  producers

15
Hong Kong Wind of Change (II)

• Government now exited subsidised purchase
  provision and focus is to facilitate cost
  effective provision of quality public rental
  housing
• Also move away from physical provision to
  financial assistance and entrusting private
  sector developers with building units which are
  then allocated to nominated Government buyers /
  tenants. Voucher system rather than physical
  provision under serious consideration

16
Modern Public Housing
17
Market Overview - Office

• Relatively weak demand continues
• Wide range of choice
• Move back to Central
• Few new entrants to market
• Grey space disappeared but essentially a case of
  musical offices
• Main rental movement restricted to Grade A and
  Central

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Supply, Demand Vacancy in Prime Areas
New Supply Take-up (net sq ft)
Vacancy Rate ()
As of September 04
Source CB Richard Ellis Limited
19
Hong Kong
20
Market Overview - Retail

• Strongest market sector, fuelled by Mainland
  visitors
• Traditional areas of Causeway Bay Tsim Sha Tsui
  in demand
• Re-emergence of strata title investors
• Re-configuration of 1st and 2nd floor podium
  space to retail use
• HA REIT initiative

21
The Arcade, Cyberport
22
New Retail Property REIT

• Link REIT to be launched in Hong Kong in
  mid-December
• First Hong Kong REIT and one of biggest launches
  this year
• 151 Housing Authority shopping centres and 79,000
  carparks valued at US4 billion

23
Market Overview Other Sectors

• Interest in 2/3 star hotels, fuelled by Mainland
  tour groups
• Hotel occupancies up, but room rates still not
  back to pre SARS level
• Conversion of industrial sites to hotel and
  guest house use.
• General business zoning failed to rekindle
  interest in industrial stock
• Loft experiment also unsuccessful

24
Market Prices and Yields

• Residential
• 1. Mass Market US6,500 per sq.m.
• 2.Luxury US13,000 per sq.m.
• Yield 3-4 net
• Office (Grade A) US9,000 per sq.m.
• Yield 5 net
• Retail (Zone A) US50,000 per sq.
• Yield 6 net

25
Market prices and yields (continued)

• Industrial US1,500 per sq.m.
• Yield 8-9 net
• Hotel (3/4 star) US500,000 per room
• Yield 7

26
The Market Players

• Those for whom real estate is a significant part
  of their business
• Property Developers
• Property Investment companies and funds
• Banks funders of and lenders to real estate
  sector
• Service providers
• Contractors
• Government

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Health Warnings (I)

• Continued Government involvement
• Lack of meaningful institutional investor pool
• Trading mentality still prevails
• Lack of sophisticated asset management expertise
• Failure to resolve long term policy/strategy
  issues
• Harbour
• Heritage
• Sustainability
• Urban Renewal

28
Health Warnings (II)

• Absence of successful P/P model
• Potential volatility of supply
• Lack of joined up thinking
• Need for strategic planning authority
• No account yet taken of intangible returns

29
S.W. Kowloon Aerial View
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S.E. Kowloon The Existing Platform
31
MTRC Mission
To develop and manage a world class railway
together with property and other related
businesses, to enhance the quality of life in
Hong Kong.
We are a company that builds and operates
railways and designs and builds communities.
32
Facts Figures

• Total route length 88 km
• Total no. of stations 49
• Daily hours of operation 19 hours
• Total no. of passengers in 2003 842M

• Average daily patronage 2.3M
• (with a record high of 3.1M onChristmas Eve
  2002)

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MTRC Portfolio by Railway Lines
Urban Lines
299,363 sq m
31,366 flats
234,898 sq m
Development
Total GFA 2.6 million sq. m.
Management
126,490 sq m
28,729 flats
130,367 sq m
Airport Railway
307,880 sq m
28,896 flats
294,072 sq m
611,968 sq m
Development
Total GFA 3.5 million sq. m.
Management
254,190 sq m
46,170 sq m
13,345 flats
Legend Office Retail Residential Hotel/Service
Apt
Tseung Kwan O Line
Total GFA 2.3 million sq. m.

Development
103,130 sq m
132,014 sq m
28,800 flats
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Kowloon Airport Station - MTRC
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Brown v/and Green Debate

• Challenge of multiple ownership in urban areas
• Attraction of green field approach
• Ever growing demand for city living
• Rural to urban migration
• Absence of, and a reluctance to use, compulsory
  mechanisms
• Growing attention to quality of life capital
• Reducing pressure on existing infrastructure

36
Urban Regeneration Area
37
Ma On Shan, Shatin
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Allocation of Development Gains

• Differentiation between capital gain attributable
  to market forces and a direct increase in land
  value attributable to an administrative decision
• No taxation of capital gain
• Increases in value arising from planning decision
  or lease modification are shared, but reasonable
  allowance made for developers profit and for the
  before value of the asset
• Payable at time of decision in full. Focuses the
  mind, but subsequent increases in value accrue
  to the developer only

39
Tuen Man New Town South
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Historical Background New Towns

• Shortage of suitable building land in urban
  areas.
• Challenge of multiple ownership
• Areas of flat farming land in the New Territories
• Influx of 2 million refugees from Mainland China
• October 1972, Governor approved major housing
  programme to provide homes for 1.8 million people
  by mid-1980s

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Historical Background New Towns (continued)

• More than half of these were planned to be in New
  Towns
• Adoption of long term comprehensive land
• use-transport-environmental framework
• First generation New Towns Concept of balanced
  development and self containment

42
Lessons Learnt New Towns

• Importance of early provision of infrastructure,
  schools, etc
• Need for public housing / Government office
  decentralisation to act as catalyst and anchor
• Private sector will follow but will not lead

43
Lessons Learnt New Towns (continued)

• Policy of self containment difficult to achieve
  in practice
• Attraction/pull of bright lights and higher
  salaries in urban areas
• High densities defeated green and other
  environmental priorities

44
Johnston Road Shophouses (1)

45
History of Urban Renewal Authority (URA)

• Established May 2001 to set new direction for
  urban renewal in Hong Kong
• Previous LDC constrained by requirement that each
  scheme should satisfy commercial viability
  criteria
• Mission is to revitalise run down areas through
  redevelopment, revitalisation and rehabilitation

46
History of URA Contd

• At same time preserve culture and heritage and
  buildings with historical value
• Endowed with compulsory purchase powers and
  ability to offer cash compensation and/or
  rehousing
• arrangements to affected parties
• Tasked to implement 225 projects in 20 years, and
  43 in first five years

47
Lessons Learnt Urban Renewal

• Social content renders most schemes commercially
  non-viable
• Need for acceptance that social element is a cost
  to the community at large
• Redevelopment should be a matter of last resort
  and focus should be on regeneration and
  revitalisation
• Social impact and the people factor are key
  issues to be addressed and reality is that soft
  is often more important than hard

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Johnston Road Shophouses after preservation
49
Thank You!

• Professional Property Services Limited