Part 1: Regulation needed (May 16, '05)
Part 2: 'Cool' not a good thing in Beijing (May 17, '05)
Part 3: Foreign money floods Shanghai (May 18, '05)

CHINA PROPERTY BEAT
Part 4: Hong Kong houses go through the roof
By Yohji Yuan

HONG KONG - The prices of luxury residential properties in Hong Kong have jumped over 40% on average over the last year. As a result, residential properties l inocated out-of-the-way locations, or near noisy factories and quays, are increasingly being hyped as high-end properties by developers, who use various gimmicks to persuade potential customers that their purchase will bring high social status. These gimmicks include "six-star" club service and "exotic living culture", meaning various perquisites intended to provide snob appeal to status-conscious buyers. One developer has even organized free table manners classes.

To most Hong Kong people, the ideal luxury residential property should be one built in a less populated area, equipped with various built-in recreational facilities, and surrounded by superb landscapes, with privacy protection. Recently, however, many new projects being promoted as luxury residential flats are somehow different.

For instance, the "Arch" residential complex, developed by Sun Hung Kai Properties Limited, has a Chinese project title controversially named after the Arc de Triomphe in Paris. The project is situated on reclaimed land opposite the buzzing Jordan District of Kowloon. Boasting a grand seascape view, the presidential suites between the 77th and the 79th floor - which may be unattainable when lifts go out of service - are priced at HK$31,384 (US$3,827) per square foot, or HK$168 million, a record high in Hong Kong's storied flat pricing history.

Another example is the Chelsea Court residential complex, also developed by Sun Hung Kai, which is located in Tsuen Wan District, New Territories, very near an industrial area. While the air quality in this neighborhood is widely recognized as extremely poor, the attractive promotion envelope for Chelsea Court includes a round-the-clock "six-star" deluxe club service, plus airport shopping coupons valued at a total of HK$1 million.

In Sheung Shui, New Territories, Noble Hill, another flagship property project of Sun Hung Kai, is about 45 minutes' ride - a lot longer in heavy traffic - from the downtown area, Central. This is seen by many Hong Kong residents as very inconvenient, considering Hong Kong's tiny size. Nonetheless, the developer has managed to sell these "remote" properties by bundling them with free table manners classes and a point-to-point automobile pick-up service between Hong Kong and the mainland.

The Rambler Crest complex, co-developed by Hutchison Whampoa Limited and Cheung Kong (Holdings) Limited, is located on the island of Tsing Yi. Many have noted that this location is exposed to constant noise and light pollution from the Kwai Chung Cargo Terminal No 9, located nearby. But the developers insist it is a high-end project, claiming that Rambler Crest is installed with a 200-meter outdoor swimming pool, an indoor clubhouse and landscaped podium gardens.

The reason why most residential projects are presented as "deluxe" is no mystery: the biggest profit margins are recorded for upscale developments. According to statistics disclosed by the Hong Kong Rating & Valuation Department, the real estate market began to rally in 2004. Since then, the average home price has climbed 29%, but that of luxury residential property has soared 42%.

Although the demand for what has been traditionally considered "upscale housing" is huge, little of the available land left for development has the necessary characteristics, according to Hui Chi-man, associate professor of the Department of Building and Real Estate at Hong Kong Polytechnic University. Therefore, flats built on below-par land have jumped at the chance to meet the shortage using advertising hype.

Some observers have warned that a speculative fever seems to have resurfaced in the real estate market, although it mainly targets the newest and most famous projects, Professor Hui noted. He also warned that speculation entails risks, and a close watch should be kept over speculative sentiment.

Mainland buyers
During this year's Golden Week holiday, which began May 1, plenty of Chinese mainland residents chose to spend their holidays on package tours to Hong Kong specially arranged for viewing Hong Kong property. A large portion of these visitors showed a willingness to purchase properties in the former British enclave, despite Beijing's current rigorous foreign exchange controls that theoretically prevent such purchases.

The growing number of mainlanders interested in property investment in Hong Kong has certainly contributed to the recovery of the property market there. Centaline Property Agency Limited, a large land agent based in Hong Kong, organized its fourth house-seeing package tour on May 1 for some 30 mainland buyers, most of whom came from well-developed cities like Guangzhou and Shenzhen. ATol interviewed the organizer and some tour members.

The "property tourists" were invited to visit the Miami Crescent complex, located in Sheung Shui District and developed by Chinese Estates Holdings Limited, as well as Chelsea Court, situated in Tsuen Wan District and developed by Sun Hung Kai Properties Limited. About half an hour after her arrival at a model unit of Chelsea Court, Shenzhen resident Hong, who asked not to be identified further, told Asia Times Online that she would love to buy a suite priced at HK$3 million to rent to tenants. Another mainlander, Liao, also from Shenzhen, planned to spend HK$10 million on a mansion between 200 and 300 square meters.

However, large-sum cross-border purchases are difficult in practice given China's tight grip on foreign exchange. Whilst numerous cash-laden mainland buyers are trying their best to drive a truck through the relevant regulations, most Hong Kong-based real estate agents have only vague ideas about where their mainland clients get their money, and many simply choose to ignore mainland buyers' financial sources. Chan Wing-kit, chief executive officer of Centaline Property Agency Limited, said most mainland clients buy properties in the name of enterprises, but refused to elaborate.

Media reports have said that some 30 tourists from the city of Wenzhou in the mainland province of Fujian visited the One Beacon Hill housing complex in Kowloon Tong District, developed by Cheung Kong (Holdings) Limited on April 30. Most of these visitors were identified as successful private businessmen, and one intended to purchase five flats valued at HK$100 million in total.

In spite of the apparent trend, it remains legally difficult, if not impossible, for mainland Chinese to buy Hong Kong-based properties. Under the "Provisional Methods of Individual Forex Management for Mainland Residents", a set of regulations promulgated by the State Administration of Foreign Exchange (SAFE) in September 1998, forex expenditures under capital account can be paid from commercial banks' forex accounts, but not from the direct purchase of foreign currencies. Related documentation must be submitted to banking and forex authorities in the application procedure for foreign money needed for direct or indirect overseas investment, and bank remittances for forex less than or equal to US$10,000 requires the approval of the local forex administration, while remittances greater than or equal to US$10,000 necessitates permission from SAFE itself.

However, beginning in January 2005, China relaxed its forex controls slightly. For single visits to Hong Kong made via the Individual Visit Scheme, mainland residents are allowed to take along no more than 20,000 yuan (US$2,410) in cash. The daily overdraft maximum for a mainland-issued credit card is 5,000 yuan, while the monthly ceiling is set at 50,000 yuan.

Furthermore, it is difficult for mainland residents to obtain mortgage loans in Hong Kong. According to Lam Kam-yu, a marketing chief in the retail banking department of the Bank of China (Hong Kong), mainland residents can be granted a mortgage equal to 70% of the property's price. But issuing mortgages requires assessing the client's financial condition, and in most cases, it is very difficult for Hong Kong banks to assess the financial status of mainland resident due to a shortage of convincing documents such as tax invoices. The widespread practice of document forgery in the mainland worsens this problem.

Given that the existing regulations discourage the purchase of Hong Kong real estate, mainland investors have to go through the following three illicit channels at their own risk, as revealed by a Hong Kong real estate agent speaking on condition of anonymity. First, they can directly smuggle currency (or other saleable financial instruments) into the territory. Second, they can move cash to Hong Kong via an underground (unauthorized) bank which operates a currency network between Hong Kong and the mainland. Third, they can transfer funds within companies that operate both in Hong Kong and the mainland. The source added that legitimate real estate agents all keep their noses clean from this so-called "channel" business.

A Centaline spokesman queried on this point claimed that the role of a real estate agent or intermediary was to show the buyers around, and to charge commission on contracted transactions; the buyer's financial sources are none of the agent's business. However, this assertion is obviously contrary to the Code of Ethics issued by the Hong Kong Estate Agents Authority Estate: "Agents and salespersons should keep themselves informed of any laws, government regulations, essential facts and developments in the real estate market in order to be in a position to advise their clients in a responsible manner. They should strive to provide services and opinions based on knowledge, training, qualifications and experience in the real estate business."

Another real estate agency insider, more conversant with the aforementioned Code, told Asia Times Online that any client suspected of money laundering will be referred to the police. If property purchases are paid by check, the real estate agent has good reason to believe that the check-issuing bank has cleared the income sources of the client. But if payment is made in cash and the agent suspects illegal sources for the income, the real estate agent should report to the police immediately.

Formal legal requirements are one thing, of course; reality is another. In point of fact, there is a long history of currency smuggling between mainland China and Hong Kong notwithstanding Beijing's theoretically firm grasp on foreign exchange. Today, the extensions to the Individual Visit Scheme have pushed both cultural and capital exchanges across Hong Kong's border to a new high, and the mainland's forex controls have turned out to be a hindrance not only to large-scale consumption abroad, but also to overseas direct investment by Chinese, a trend which will only increase as China's economic development proceeds apace.

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