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Hong Kong gets real on property prices with a nudge from Beijing

A general view of residential and commercial buildings in the Kowloon district with the skyline of Hong Kong Island past Victoria Harbour in the distance, August 3, 2019. (PHOTO: Anthony Wallace/AFP/Getty Images)

By Shawna Kwan

(Bloomberg) -- After hammering Hong Kong’s flagship carrier into submission over its handling of staff involved in the city’s pro-democracy protests, Chinese authorities are taking aim at a bigger target.

In a rare break from the cozy relationship Beijing maintained with Hong Kong’s property magnates for decades, state-owned media has recently criticized the inflated housing market that enriched them and called for action to damp home prices. The city’s most-famed billionaire, Li Ka-shing, even drew a public rebuke from China’s government.

“This shows that the relationship between Beijing and Hong Kong developers has entered a new stage,” said Ivan Choy, a politics lecturer at the Chinese University of Hong Kong.

What that new stage might look like is coming into focus, with Hong Kong’s government pushing ahead with a tax on vacant apartments and vowing to increase the use of an ordnance that allows it to force purchases of agricultural land from developers. Property companies are digging in, mounting a campaign to beat back the vacancy tax.

What’s Beijing’s political calculus?

With China firmly opposed to meeting pro-democracy protesters’ five demands -- ranging from police accountability to universal suffrage -- and the unrest in Hong Kong showing no signs of abating, sky-high property prices and billionaire developers offer a convenient foil. While cheaper housing isn’t among protesters’ demands, it’s widely believed that lack of affordability is a key source of discontent.

What’s the immediate impact on property prices?

Analysts at Knight Frank LLP forecast prices may fall 5% in the second half, while Jones Lang LaSalle Inc. expects a 10% dip in the same period, meaning Hong Kong will almost certainly hold onto its crown as the world’s least affordable housing market. So far, secondary-home prices have declined marginally since protests erupted in June.

“Developers may offer more promotions in areas with higher supply but won’t cut prices drastically, ” said Thomas Lam, an executive director at Knight Frank.

Louis Chan, an analyst at property agency Centaline, says some developers have cut prices by as much as 10% from June levels to clear inventory that would be subject to the proposed vacancy tax. They’re still selling those units at a profit, he said. Longer term, if the tax takes effect, developers will be under pressure to sell more apartments while projects are under development, he said.

While major Hong Kong home builders control vast areas of agricultural land -- almost three times the size of Central Park -- most land repurchased will probably be used for public housing, limiting the scope for increases in private-housing supply.

Then there’s the issue of limited land supply, which may take decades to resolve even with aggressive government initiatives like a huge reclamation project off Lantau island. Until meaningful new private-housing supply comes online, upward pressure on prices is likely to persist, market observers say.

What are developers most worried about?

Developers are firmly opposing the vacancy tax and have urged the government to withhold the bill, which it has prioritized on the agenda of the new legislative session. They argue the levy could pose a threat to the financial system because the economy is already showing signs of tipping into recession.

The tax will apply to all new residential projects that have been completed and empty for at least a year. It “will obscure property developers’ earnings visibility, particularly those in the luxury segment such as Kerry Properties Ltd., Sino Land Co. and Sun Hung Kai Properties Ltd.,” according to Bloomberg Intelligence.

Hong Kong’s Financial Secretary Paul Chan told China’s state-run Global Times that the government plans to use the Land Resumption Ordinance to repurchase more than 700 hectares of land over the next five years, mainly for public housing. Yet increased use of the LRO won’t necessarily hurt the big developers, according to a Sept. 12 research note from Goldman Sachs Group Inc.

There are published rates for purchasing farmland to use for public housing, and some of the developers’ current land banks have limited commercial value, Goldman analysts Justin Kwok and Colin Yao wrote.

© 2019 Bloomberg L.P.