After my two week visit to mainland China, I spent a few days in Hong Kong. I was amazed by how cosmopolitan the city was and how much it resembled New York City. Its pristine office buildings are situated between the mountains and the sea, and the city is easily accessed by the subway system.
After seeing commercial and industrial real estate here, I remain in sticker shock. Hong Kong has the most expensive real estate in the world. According to C&W, its top office space leases for $248/SF, more than double NYC’s $114/SF. This makes NYC seem like a very affordable option for a global company to locate to, as we have only the 18th most expensive office space in the world, ranking behind London, Moscow, and Paris.
Office condo sales are also prevalent in HK. I toured a 1,885 SF office condo in Central HK with direct sea views. The price: $40 million HK which equates to almost $5,125,000 US or $2,720/SF. This is an amazing number considering office condos in NYC sell for less than a third of this.
I then toured some of the most expensive residential real estate in the world. According to Citihabitats, the average price of a HK luxury apartment is $11,000/SF, almost three times NYC’s $4,100/SF. NYC was only 6th on the list behind Tokyo, London, Paris, and Moscow. Come again? This makes NYC not only seem affordable, but a bargain.
As all new residential product in HK sells out of show rooms, we first toured Phillippe Starck’s Yoo project. The showroom was located on the ground floor of a very high end mall. Dozens of residential brokers were lined up and trying to sign potential buyers as their client before they entered.
Once inside, we went into a massive, empty room that soon went entirely dark. The walls doubled as giant video screens, showing models on runways and scenes from restaurants and the city as techno music blared. There was not one shot of the proposed building. They were clearly selling a lifestyle.
The Yoo project’s foundation is currently being finished so its completion date is scheduled for 2015. It will contain 144 micro units where a 1 BR measures only 355 SF. I was amazed by the efficiency of the layouts. Perhaps NYC developers could deliver this type of product to attract foreign buyers.
The Yoo sales office has been open for four months and has already sold 40 units where buyers placed 20% deposits, and wait for completion of the product. The prices achieved to date have been between $9,500,000 (HK) to $27,000,000 (HK) for a combination unit, meaning the US prices range from $1.2M to $3.4M with prices per foot from $3,500/SF to well into the $4,000’s. These apartments could be rented for returns of 2-3%, which is supposedly irrelevant to investors there as they solely focus on appreciation. This was similar to the mainland where values have increased ten fold, in some cases, over the last 5 years. But it seems this will not be sustainable.
Attempting to cool down an overheated real estate market, the HK government imposed penalty taxes of 20% if a unit is resold within a year, 15% if resold in two years, and 10% if resold in five years. This government plan is a real concern for local and foreign investors which could possibly bring more foreign investors our way.
After we toured the showroom, we headed out to see some of the most expensive apartments in the world. The most coveted HK apartments are located in the mountains on The Peak and in Recluse Bay. Here a 1980s, 2,500 SF apartment with views of the sea will sell for $10M US. Single family homes trade for $100M or more. I must say the landscape was beautiful, as new homes were perched up in the mountains with views of the sea and beaches. However, most of the build outs were very dated and inferior to NYC construction.
HK has strong land use restrictions as most of the mountain land is protected, so new development is exceptionally rare. For the mountain sites available, they are very expensive to build on as the foundations required for the steep inclines can lead to hard costs exceeding $1,500/SF. One of the only new projects offered is a Frank Gehry designed opus where prices range from as high as $400-$500M/SF (HK) or $50M to $65M (US). At 12 stories, it has only 10 apartments measuring 6,000 SF each. According to Bloomberg, it was built for $3,477/SF, including the land.
Additionally, almost all of HK land is leased from mainland China, which expires in 2047. Brokers said buyers were not too concerned with what happens on this date, and everyone seems to believe it will be extended. However, I would have concerns over where the ground rent would be reset. There are some rare instances of freehold apartments being sold on 999 year ground leases.
In all, my trip to HK made me realize the inherent upside that NYC has to offer global investors. Our quality of life is certainly comparable, and our residential and office product is of the same or better quality. With our values being two or three times less, we have plenty of room to grow. As our investment properties also provide double the returns in the interim, it is shocking to me that we have not seen more buyers come from HK, especially when they do not have the same restrictions of transferring money to the US as they do from mainland China.
While visiting HK I met with several local brokerage and law firms who said they had scores of investors eager to invest in the US, so it would not surprise me if we see them account for a larger percentage of NYC sales moving forward. I believe we have not even seen the tip of the iceberg yet.