Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko Analysis of Housing Market in Hong Kong Introduction [1,952 Words] In Hong Kong, housing served citizens and foreign for both residential and investment purposes. It also provides investment opportunities for speculation and wealth accumulation to local residents and investors and attracts capital influx into HK’s economy. According to (Leung, 2005), these housing activities amounted to about 22% of GDP in Year 2002, making property industry became the second largest industry in Hong Kong.

Moreover, the business activities related to housing market has contributed the government a stable source of income on substantial revenue through land sale, government rates and rent, stamp duty and other related tax income. The substantial revenue help government keep necessary public services in operations and provision of new public goods to satisfy increasing needs from the society such as the low-rental public housing, medical services, provision of additional infrastructure to enhance connectivity of New Towns in the New Territory.

This can maintain Hong Kong as a world-class and prosperous city. Thus housing market always plays an important role in the future development of Hong Kong. In the following section, analysis would be emphasis on the housing market in Hong Kong through examine the opportunity cost for developer to do investment, factors affecting the demand and supply of housing, the externalities generated and identify the sources of inefficiency and inequity resulted. 1.

Housing Scarcity in Hong Kong Housing is a very scared resource in Hong Kong due to limited land suitable for development, tight restrictions on town planning, lease control and building design and termination of Government Home Ownership Scheme (HOS) in 2002. On the supply side, developer tends to plan their development carefully and employ professional surveyors to carry out feasibility studies with a view to maximize the development potential of their land and maximize their profit.

Developer would examine different development options and the profit of the next best development option forgone is also called the opportunity cost of the chosen development option. On the demand side, the demographic trend indicated that household size is decreasing causing an increase in demand for new housing units. Further, the rising house price gave confident and encouraged the housing speculation activities which expanded the investment demand for housing. Page 1 of 33 Chan Ming Ko 0900557 Page 1 of 33 K107CMF 001 2009/0

Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko The mismatch of supply-and-demand was well-rooted in our housing market leading to the housing scarcity problem, and greatly affected the amount of disposable income for the low and middle income classes in Hong Kong. 2. Conditions of Demand House price is the main determinants which influence the housing demand, other non-price factors such as income level, preferences of individuals and expectations are considered as conditions of demand. . Levels of Household Wealth and Disposable Income Housing affordability is the most inclusive and best measure of housing demand in Hong Kong. It is the percentage of monthly household disposable income contributed to the mortgage repayment as shown in below figure from HKMA. There is a sharp decline of housing affordability ration in the precedent 11 years, meaning that housings are much affordable since the collapse of “housing bubble” in 1997.

In addition, the Hong Kong Monetary Authority (HKMA) has launched a regulatory measure to limit the mortgage loan to property value to 70% ensure affordability of homebuyers and reduce the default risk of mortgage. Mortgage insurance are required to obtain higher loan percentage by applying from Hong Kong Mortgage Corporation (HKMC). With the real income growth, households can trade up-market by selling the existing units they occupy and buying larger and higher-quality units.

This will push prices up at the middle to the upper end of the market, while prices at the lower end of the market will stagnate or even fall as they are considered inferior goods. Page 2 of 33 Chan Ming Ko 0900557 Page 2 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko It is expected that through urban renewal, the private housing market will automatically adjust and demolish those dilapidated and obsolete housing and redeveloped into larger units that are in higher demand.

The average unit size and the quality of the housing stock will increase over time, and housing prices will grow higher. b. Economy in Hong Kong As shown in the below figure, the GDP had dropped sharply in 1Q2009 at -7. 5%. However, it has gradually improved to -3. 8% in 2Q2009. The forecasting GDP in 3Q2009 and 4Q 2009 is expected to improve to -2. 1% to 1% respectively according to the forecasting result from The University of Hong Kong Macroeconomic Forecast Report.

On the other hand, the latest announced unemployment rate has been dropped for three consecutive months from the peak of 5. 4% to 4. 7% currently. The downward trend of unemployment rate will help generate a stronger house purchasing power and thus the property price is expected to rise in near future. With the 10 Mega-Infrastructure Projects going to be launched by the government and the strong capital influx via the quantitative easing policy from PRC Government, it is expected that the worst moment of economy has passed and economic is likely to grow in 2010.

Page 3 of 33 Chan Ming Ko 0900557 Page 3 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko The combined effect of income growth, GDP recovery, lower unemployment rate, inflation and low-interest environment continue to dominant, these indicators show an improving outlook for Hong Kong in 2010, which will give confident to home buyers to invest in the housing market more aggressively and it is expected that house price will continue to appreciate. c. Prices of Other Goods and Services.

The alternative to buy is to rent a house. With house price rises, landlord may be less eager to let out vacant unit and may prefer to sell the flat to capture the profit immediately. These will effectively reduce the flats available for renting and result in rent increase in short term. Furthermore, with low mortgage interest rate at about 2% p. a. (Overnight Rate + 1 to 2%), which keeps the mortgage repayment much lower than the rental rate (In average around 4-6%) and this will encourage people to buy instead of renting a house.

Complements are products consumed in conjunction to house purchase. With increase in Page 4 of 33 Chan Ming Ko 0900557 Page 4 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko house price and transaction volume, certain products such as construction cost, professional fees and legal fees will rise due to rise in demand. With government continue to give income tax relieve on mortgage interest, waiver of government rent, subsidy on electricity charge, these measures will help o relieve the burden of home buyer. d. Preferences and Tastes of Households and their Attitude to Housing Households may occupy more than one housing unit. Some high-income households may own a second unit as a vacation home or for renting purpose. Households living in public housing may also occupy more than one housing unit for a different reason. According to (Wong, 1997), the Housing Authority estimated that about 13 percent of public rental housing tenants, or about 74,000 households, own private domestic properties.

The strong investment demand will act as an accelerant for rising house price. e. Expectations about Future Events The high land price achieved in recent land auctions is a strong signal of premium on housing futures market: Developers have been rationing inventory and have bid aggressively in land sale which provides a good indications for ‘futures’ house price and realized the urgency of developers to prevent a stock-out. Other factors will be discussed in the later session. 3.

Conditions of Supply House price is the main determinants which influence the housing supply, other non-price factors such as prices of resources, prices of other types of property, technology available, expectation, size of firm, indirect taxes or subsides from Government and unplanned occurrences and objective of developers are said to be conditions of supply. a. Land and Housing Supply To maintain a stable property development by private market, the government has decided to resume land supply through the application list system starting from January 2004.

This system is market-driven and could lower the risk of over-supply and reducing government intervention in the housing market. In addition, supplying land through the application list system can also provide the property market with information on land sales by the government and increase the transparency of the property market. This land supply system is thus advantageous to fostering a healthy and normal development of the housing market. Referring to the table below, the number of completed housing units is Page 5 of 33 Chan Ming Ko 0900557 Page 5 of 33 K107CMF 001 2009/0

Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 declined over the past few years. CHAN Ming Ko b. Opportunity Cost (Other Development Options) Developer should employ professional surveyor to study different development options such that the return can be maximized. For example, in Central Business District, developer will prefer to develop hotel, shopping arcade or office buildings instead of housing in order to enjoy long term rental income and better development parameters such as site coverage and plot ratio.

Construction Cycle The construction cycle usually last for 3 to 4 years especially in large-scale project such that new sites cannot meet immediate housing demand requirements. The constraint on physical delivery implies that the earliest that new sites could be offered for presale would be too late to quench existing housing demand. Partnering with contractor and consultant would speed up the development process such that the developer can capture and response to the market demand for quickly as well as fully utilize their expertise in the development process.

Future Expectation Reducing intervention by the government from the housing market has meant the removal of some 15,000 HOS units pa from the housing market. Some of the demand should be channelized into the private housing market. With physical delivery four years away and limited stock, developers have to ration their inventory in order to maximize sale proceeds. In order for developers to meet profit estimates, property companies must maintain high profit margins in order to maximize the returns. c. d. Page 6 of 33 Chan Ming Ko 0900557 Page 6 of 33 K107CMF 001 2009/0

Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 e. Market Structure CHAN Ming Ko The private housing market is dominant by a few large developers. Referring to the figure below, CR5= Output of 5 largest firms/ Output of whole industry =36369/56425 =64. 4%. This indicates that there is a high degree of market concentration in the housing market. Furthermore, the housing market requiring a developer to have high capital investment and professional knowledge, hence there is a high entry barrier.

Thus, the housing market can be regarded as an oligopoly market and the developers are said to be oligopolistic interdependence, i. e. every decision a developer takes will provoke a reaction by other developers. Under the oligopoly market structure, there will be limited price competition and higher price stability in the property market since the developers favor non-price competition through aggressive advertising, in-house research and high quality housing development, Referring to the below demand and revenue curves, there will be a good chance that the MC curve will pass between the MR gap (M1M2).

Since oligopolist (the developer) is a profit maximizer, which aims to equate marginal revenue with marginal cost. Since developers enjoyed the oligopoly power and protected by the barriers to entry, developer are expected to earn supernormal profit, both in short run and even in the long run Page 7 of 33 Chan Ming Ko 0900557 Page 7 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko 4. Perverse Demand Behavior Perverse demand behavior is defined as a product demand response in the same direction as a change in the price of that product, i. . a rise in the price of a good will cause an increase in demand. Housing also inherent such behavior. Price rise in housing can strengthen our expectations of further price increases. Thus, people have stronger housing demand either for self-occupation or they expect to realize a capital gain by reselling the house. This is called the speculation case. 5. External Effects Positive Effect: 1. Wealth Accumulation: Home ownership and property investment can help resist inflation and provide rental return.

Home ownership: it gives citizens a stake in society, enhances stability, security, control and so contributes to the ‘social fabric. ’ homeowners have greater financial stake in their neighbourhoods, they typically remain in their homes for a longer period than renters, thus indirectly contributing to the stability to their neighbourhoods. 2. Social wages: Public housing effectively reduced the housing expense of low-income group, this served as a social wages so that low-income group can have enough disposable income for their daily expenses. Page 8 of 33 Chan Ming Ko 0900557 Page 8 of 33 K107CMF 001 2009/0

Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko 3. Better Communal Space Some part of development contributed to street widening, public open spaces or public transport interchange, which has enhanced the community space. Negative Effect: 1. Environmental Hazards During the construction stage of housing, waste, noise and dust will be generated which will produce environmental hazard to the neighbourhood. 2. Destroy of Neighbourhood Relation In urban redevelopment, the existing community will be compensate monetarily and relocated to different locality.

Some of the buildings with heritage value may be demolished and redeveloped to modern type buildings. Finally, it would destroy the existing neighbourhood relation. 6. Sources of Inefficiency Housing market are inefficiency are resulted due to inherent imperfection in the market such that econoligopolistic collusion and welfare distribution will not achieve maximum level. This inefficiency is called market failure. The sources of such imperfections are: 1. Oligopolistic power Developers with oligopolistic power will tend to restrict output in order to force price up.

This leads to welfare loss as explained in the previous session. 2. Imperfect information In housing market, developers controlled the information flow in the market which consumers only get limited information or even misinformation. As such, the price and profit signals that allocate resources are distorted or misinterpreted and welfare losses result. External Effects are the impact to a third party outside the housing market. For example, the noise and dust generated in the construction process will badly affect the surrounding environment and people in the vicinity.

When these external costs are ignored, the market causes overproduction from society’s point of view. Some of the resources used in these markets would be better used elsewhere in the economy, thus leading to inefficiency. Page 9 of 33 Chan Ming Ko 0900557 Page 9 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko 3. Macro instability Developer tends to maximize their profit, leading to optimization in housing market. In a broader view, this sub-optimal llocation of resources may result in inflation, housing affordability problem or other social problems which are not desirable to the public at large and the macro-economic stability. 7. Sources of Inequity Issues Economic equity refers to the fair distribution of goods both vertically and horizontally. The sources of such unfairness in Hong Kong housing market is the oligopolistic power of developer in the housing market leading to asymmetric information flow, their supernormal profits, developer’s power to set the price and inelastic supply in housing.

These result in weak bargaining power of consumers in housing market and high house price. And lead to serious consequences such as social polarization, difficulty for low- and middle- income classes to climb up the housing ladder, etc. Page 10 of 33 Chan Ming Ko 0900557 Page 10 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko Analysis of Future Housing Demand and Housing Development Strategy in Hong Kong [2,712 Words] Introduction In Hong Kong, Housing remains the most important form of savings for many households.

Changes in property prices and rentals remain significant determinants of inflation and affect Hong Kong’s competitiveness. At the beginning of 2010, the property market has seen a tremendous recovery since the financial turmoil in 2008. Sales volume and prices picked up across most of the property market sectors, particularly in the luxury residential market. However, the uncertainties in economics involving interest rate expectations, affordability, disposable income levels, GDP growth, price expectations, demand and supply of new housing and government housing policy are the major factors for housing demand drivers.

For the purpose of maximizing the profits on short and medium-term planning, it is necessary to thoroughly examine the future housing demand and the sustainable housing development strategy in these volatile market conditions in Hong Kong Property Market. In the following section, analysis on the housing market in Hong Kong would be carried out through examining the opportunity cost for developer to do investment, factors affecting the demand, supply of housing, the external effects generated and identify the sources of inefficiency and inequity resulted.

Then, we will forecast the demand for new housing and propose the best short- and medium-term developer’ strategy. Page 11 of 33 Chan Ming Ko 0900557 Page 11 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 Property Market Demand Drivers CHAN Ming Ko It is generally accepted that housing demand and market confidence is governed by macro-economic drivers of demand such as trend of mortgage rate, affordability index, economics performance, supply and demand of new housing and government intervention.

The major factors affecting the future housing demand in Hong Kong property market would be investigated in the following sections. Demand Factors of Property Housing Market 1. Low Mortgage Lending Rate Local commercial banks are likely to maintain the low lending rate until the US hikes interest rate aggressively. The loose credit policy is expected to last for a longer while to support the fragile US property market and the recovery of domestic economy. Secondly, the total deposits in the local banking sector increased by 14. 4% to HK $3,267 billion on the back of strong capital inflow in the year to

August 2009 and the trend of capital inflow is likely going keen in near future, but a lack of lending opportunities drove total bank loans down by 3. 4% to HK $2,312 billion. As a result, the banking sector’s loan to deposit Page 12 of 33 Chan Ming Ko 0900557 Page 12 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko ratio declined yearly from 60. 2% to 50. 4%. Competition among commercial banks for lending opportunities will remain fierce with bank deposits rising rapidly and loan demand stagnating.

This will force commercial banks to continue to extend credit to homebuyers at super-low interest rates. Based on the prediction figures in figure 1, it is expected that the best lending rate will be kept as low as 6% until the end of 2011. Low lending cost for mortgage financing is certainly a back up for a strong housing demand in coming years. 2. Recovery of Economic Performance According to the GDP figures from Statistics Department at HKSAR, the real GDP had a sharp dropping trend in 1Q2009 at -7. 5%.

However, the dropping trend has become moderately improved to -2. 5% in 3Q2009. In addition, the latest announced unemployment rate has been dropped for three consecutive months from the peak of 5. 4% to 4. 7% currently. With the commencement of 10 Mega-Infrastructure projects of approximate HK$250 Billion in total value and the strong capital inflow from the quantitative easing policy from Central Government, it is expected that the worst moment of economic performance has been gone and more solid growth is likely to be seen in 2010.

The improvement of unemployment conditions will help push up the disposable income level which generates a stronger house purchasing power and thus the property price is expected to rise in near future. Page 13 of 33 Chan Ming Ko 0900557 Page 13 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 3. Low Affordability Index CHAN Ming Ko The affordability index graphed in figure 3 measures the burden on households when buying homes.

It is derived from dividing a typical monthly mortgage repayment by the median household income-a rise in the index thus represents deteriorating affordability. The significant increase in the run up to 1997 was followed by a sharp decline in the proceeding 10 years. It means that the affordability on purchasing house has been much improved since the “real estate bubble” in 1997. In addition, the Hong Kong Monetary Authority (HKMA) has launched a regulatory measure to limit the Loan to Mortgage Value to 70% ensuring the least chance on worsening the affordability of homebuyers. . Demand of New Housing and New Development Sites It is expected that housing supply will remain tight for at least three years. Hong Kong’s residential market entered a new phase after 2005 when housing supply dropped significantly following the government’s efforts to tighten land supply. Only two small parcels of government land have been sold through public auctions during 2007 and 2009. The high land price in recent land auction indicates a strong signal of premium on housing futures market. Page 14 of 33

Chan Ming Ko 0900557 Page 14 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko Developers have been rationing inventory and have bid aggressively in land sale which provides a good indications for ‘futures’ house price and realized the urgency of developers to prevent a stock-out. The last public auction of a tiny government site was held back in May 2008 and there will be no completion of MTRC rail projects by the end of 2011 which also help limit the supply of new development site.

Secondly, according to the new housing completed data from Statistical Department of HKSAR as shown in the table above, less than 14,000 residential units per year are slated for completion between 2009 and 2011-much less than the annual average of 26,000 completed from 1991 to 1997 and 27,600 completed from 1998 to 2004. The limited supply of new housing will help push up residential prices and rents, particularly when the local economy enters a substantial growth phase. Page 15 of 33

Chan Ming Ko 0900557 Page 15 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko According to the property price index from Centaline Property Agency from the figure above (where base level is 100 in 1997), the property index has seemingly increased since the Q1 2009 for about 28%. This indicates a strong demand of new housing. In short, the property price is expected to surge with the increasing demand and limited supply of new housing. 5.

Influx of Property Investment Capital from Mainland Immigrants Population growth is one of the major market demand drivers in housing market. Hong Kong’s natural growth of population is likely to remain low, ranging from 7. 0 to 7. 2 Million, according to The Economist Intelligence Unit, HKSAR. However, there have been various immigration schemes implemented by HKSAR Government to attract wealthy people from Mainland China to settle in Hong Kong since 2003 facilitated a new wave of mainland immigrants, which has a potential to change the dynamic of housing demand in future.

One of the immigration schemes that gave an almost immediate boost to local housing demand is the Capital Investment Entrant Scheme (CIES) which allows Chinese Nationals who have obtained permanent status in a foreign country to apply for Hong Kong residence if he/she invested HK$6. 5 Million in the HK real estate market or financial market as shown in the table above. Immigration Department statistics have shown a steady rise in the number of mainland Chinese applicants for CIES. The number of mainland applicants has risen from just Page 16 of 33 Chan Ming Ko 0900557 Page 16 of 33 K107CMF 001 2009/0

Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko over 200 in 2004, when the scheme was first introduced, to more than 1100 in 1H2009. The total consideration of property investments made by successful applicants has jumped from HK$739 Million in 2004 to more than HK$1. 9 Billion in 1H2009. Page 17 of 33 Chan Ming Ko 0900557 Page 17 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko The proportion of individual buyers of mainland immigrants has increased from 4% in 1Q2006 to 10% in 3Q2009 as according to the figure below.

The increasing trend of property investment by mainland buyers is primarily due to the same cultural origin and geographical proximity between Hong Kong and Mainland China, more familiarity of the Hong Kong property market to mainlanders, the free flow of capital in Hong Kong thus rendering mainlanders easier to channel money into Hong Kong, as well as Hong Kong’s more liquid property market. In addition, mainlanders’ purchasing power for Hong Kong properties is also lifted by the appreciation of Renminbi.

With the immigration scheme (CIES), the strong purchasing power and demand of new housing in Hong Kong is expected to be keen for wealthy mainland buyers. Page 18 of 33 Chan Ming Ko 0900557 Page 18 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 Supply Factors of Property Housing Market 1. Government Intervention and Housing Policy CHAN Ming Ko There are three major objectives of Government’s housing policy in Hong Kong: 1. To subsidy the low-income families who cannot afford private rental accommodation on home purchasing and ownership. . Minimize the intervention in the private property market 3. Maintain a fair and stable operating environment for the private property market by ensuring adequate land supply and the development of an efficient supporting infrastructure. a. Home Ownership Scheme-Housing Supply Policy Since 1978, more than 452 100 subsidized sale flats have been sold to eligible households at discounted prices under the Government’s various subsidized home ownership schemes such as the Home Ownership Scheme (HOS)/the Private Sector Participation Scheme (PSPS) and the Tenants Purchase Scheme (TPS) run by the HKHA.

In late 1997, the overall property price reached the peak value, the government formulated a policy of producing new housing units at least 85,000 residential units per year. The vacancy levels rose upon implementation of the policy and this also attribute to a crash in local home prices between 1997 and 2003 due to the excessive supply of new housing units implemented under this scheme. To address the adverse influence to the property market, the new housing unit scheme was terminated in September 2001 and halted the production and sale of subsidized HOS flats in 2003.

Page 19 of 33 Chan Ming Ko 0900557 Page 19 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko According to the figure above, there have been no subsidized HOS flasts produced since 2001 and the proportion of publich housing production of total housing production has been dropped to a low level since 2006. The remaining HOS flats were sold in different phrases starting from 2007 with between 2000 and 3000 flats per each sale ensuring the minimal intervention to the property housing market.

On the other hand, increasing the supply of public low rental housing for the low income groups is considered as a more appropriate policy to meet the housing needs of the underprivileged with less adverse intervention to private housing market. It is believed that the disruptive government housing policy of excessive subsidized new housing units such as HOS flats implemented in 2001 is unlikely repeated again in future to ensure a healthy supply of residential housing units in property market in future. Thus the supply of new housings will be limited in coming years . Land Supply System To maintain a stable property development by private market, the government has decided to resume land supply through the application list system starting from January 2004. This system is market-driven and should be able to accommodate housing demand in a more appropriate way than the regular land sales system. This system could lower the risk of Page 20 of 33 Chan Ming Ko 0900557 Page 20 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko ver-supply and reducing government intervention in the property market. In addition, supplying land through the application list system can also provide the property market with information on land sales by the government and increase the transparency of the property market. This land supply system is thus advantageous to fostering a healthy and normal development of the property market. 2. Market Structure and Profit Maximization In the market for new residential property, private developers play an important role in supplying housing stock from new land and redeveloped land.

According to the source from Goldman Sachs Research Estimates of the above figure, there is a high degree of market concentration among developers. Among 70% of total new private housing was supplied by seven major developers in Hong Kong, thus the property development market structure is classified as oligopoly. Profit maximization requires that developers ration limited inventory. Hence, given the current ‘shortage’ in land supply from government and new MTR railway development site, a rise in property prices would encourage developers to ration supply of new housings until a reliable source of supply of raw Page 21 of 33

Chan Ming Ko 0900557 Page 21 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko land could be found in near future. Thus, under this oligopoly market structure, there will be limited price competition and higher price stability in the property market since the developers favor non-price competition through aggressive advertising, in-house research and high quality housing development,

To conclude, the future housing demand is likely to surge in coming few years as the property market will continue to benefit from low mortgage rates, low affordability index, improving economic performance, limited supply of new housing and strong demand of housing, limited government intervention in housing market, non-price competition market structure and influx of property investment capital from mainland buyers.

Hong Kong will remain one of the most sought after investment markets in Asia and the risk of “real estate bubble” burst is generally lower than the bubble year in 1997 subject to the negative changes to government policies, liquidity stimulus plan, interest rates and monetary policy. Page 22 of 33 Chan Ming Ko 0900557 Page 22 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 Analysis of Housing Development Strategy CHAN Ming Ko

As according to the data of new housing completion from Rating and Valuation department, there has been a decreasing trend of new housing completed since 2004 and the expected completed units are likely remained low between 2009 and 2011. Other than the factor of supply of new housing in future, another major factor is the trend of residential property price in the three districts in Hong Kong including Hong Kong Island , Kowloon, New Territories East and West. According to the residential price figures from Centaline Property Agency below, the residential price on Hong Kong Island outperforms the rice in other districts and likely to rise up to the level of real estate bubble year in 1997. Page 23 of 33 Chan Ming Ko 0900557 Page 23 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko On Hong Kong Island, the property price in traditional residential market has averagely risen for about 20% to 30% from November 2008 to November 2009 according to the data from Colliers International (HK) Ltd.

Particularly for the luxury residential properties located in Peak and South side, the property price has risen for more than 35% yearly. The strong demand for residential properties on Hong Kong Island strengthened due to the higher investment value since Hong Kong’s core business district such as Central and Admiralty is located on Hong Kong Island, which attracted the high-income group and expatriates. In addition, there is a growing appetite for prime residential units of upper-middle luxury estates among the mainland buyers according to the source from Goldman Sachs Research estimates.

The proportion of mainland buyers for purchasing property on Hong Kong Island has increased from 5% to 13% yearly and for purchasing upper mid-end has increased from 4% to 16% respectively as according to the figures below. Page 24 of 33 Chan Ming Ko 0900557 Page 24 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko What’s more, there is the tight supply of upcoming completion of residential properties on Hong Kong Island in 2010.

According to the figures below from Colliers International (HK) Ltd, there are only about 10 luxury residential development projects under construction on Hong Kong Island which is unlikely to meet the projected demand of property on Hong Kong Island. Page 25 of 33 Chan Ming Ko 0900557 Page 25 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 External Effects 1. Income Inequity CHAN Ming Ko Under a recent UN Development report, Hong Kong ranked No. 1 amongst the world’s most developed economies for income inequality.

The richest 10% in the city receive 34. 9% of the total income here, while the poorest 10% receive just 2%. The ratio of income, share of top 10% to share of lowest 10%, is around 17. 8 which is the highest one around the world. This indicates that the serious income inequality and most of the wealth is dominated by the top richest of 10% to 20%. Thus the demand of luxury residential property is expected to grow more than low and medium-ended property in coming years. 2. Low Income and Property Tax Hong Kong’s income/salaries tax system (the two terms are synonymous) is one of the world’s simplest.

No one is subject to more than a total rate of 16% tax on his income which is lower than most of the income tax rate in the world. Property tax is charged at a standard rate of 15% of the property’s net assessable value. The net assessable value is the assessable value (after deduction of rates paid by the owner, and irrecoverable rent), and then less an allowance of 20% of that assessable value for repairs and outgoings, regardless of whether or not repairs and outgoings were actually incurred. Plus no capital gains tax in Hong Kong.

The low income and property tax rate could stimulate more consumption expense on purchasing property and motivate business investment activities. To conclude, the demand of residential units on Hong Kong Island, in particular for the luxury units, is expected to grow in coming years since the property market takes the benefits of strong recovery of business activities such as finance and banking industry in 2009 and the strong demand of high-end residential buildings from overseas home purchasers particularly the mainland buyers. Page 26 of 33

Chan Ming Ko 0900557 Page 26 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 A. Short-term Developer’s Strategy 1. Presale Strategy CHAN Ming Ko Due to the limit supply of new development sites and new housing produced in the next few years, there should be an emphasis on shifting from housing volume to margins. The developers could limit the supply of new housings and maintain a sustainable housing stock inventory to reduce the market competition. This strategy is very similar to the developers’ presale strategy of the mid-1990s 2.

Urban Renovation and Redevelopment Due to the shortage of new lands in urban districts on Hong Kong Island, the potential short term development strategy is to develop luxury residential buildings on Hong Kong Island for the location closed to the core business zone and the location with mass transit railway connection such as Sheung Wan and Wan Chai through urban redevelopment approach. Existing MTR Railways Network in 2007 The districts of Sheung Wan and Wan Chai are one of the earliest developed urban areas on Hong Kong Island which has been substantially developed for private residential, retail services and office use.

To achieve urban regeneration, it is unavoidable that redevelopment is a key way to rejuvenate the community. Page 27 of 33 Chan Ming Ko 0900557 Page 27 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko To capitalize the limited resources, there are two large-scale redevelopment projects carried out in the following selected area: 1. Wedding Card Street(Lee Tung Street), Wan Chai 2. Queen’s Road West (Since 1941), Sheung Wan

Most of the private residential areas are characterized mainly by the existence of 5-10 storeys old buildings of age of over 40 years old. The old buildings are in poor condition owing to lack of proper maintenance and lack of urban social facilities such as health & elderly services as shown in the following photos. Wedding Card Street (Lee Tung Street), Hong Kong Queen’s Road West, Sheung Wan Urban redevelopment of the aged buildings is thus necessary to speed up improvements to the environment of older urban areas by considering the economic viability, sustainable urban design and socio-cultural and heritage characteristics.

Feasibility studies can be carried out to identify which options could achieve higher returns by considering the time, cost, plot ratio, site coverage, land premium, remaining period of tenancy and other related factors. A potential property redevelopment theme is the mixed use development with a mixture of high rise residential buildings, shopping mall and community services. Page 28 of 33 Chan Ming Ko 0900557 Page 28 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 CHAN Ming Ko B.

Medium Term Development Strategy-Railway and Residential Development Viewing on limited supply of new land and the need of large scale transportation, there will be further proposed mass transit railway infra-structure projects to be developed between 2010 and 2020. The upcoming railway projects within Hong Kong district are mainly linked with Hong Kong Island, Kowloon District and East New Territories. 1. Sha Tin to Central Link (Expected to be completed in 2018) 2. South Island Link (Expected to be completed in 2016) 3. West Island Link (Expected to be completed in 2013) 4.

Guangzhou Shenzhen – HK Express Rail Link (Expected to be completed in 2015) The completion of South Island Link and West Island Link will certainly provide potential railway based residential development areas on Hong Kong Island by the end of 2015. The West Island Line will link up Sheung Wan to Kennedy Town while the South Island Line (East) will link up South Horizons and Wong Chuk Hang to Admiralty which a direct linkage Page 29 of 33 Chan Ming Ko 0900557 Page 29 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1

CHAN Ming Ko between residential area to core business areas like Wan Chai, Central and Admiralty. This Transit-Oriented Development (TOD) is widely considered to be one of most sustainable forms of urban development taking the characteristics of 4 “D” built environment. 1. Density-Having enough residents, workers and shoppers within a reasonable walking distance of transit stations to generate high ridership. 2. Diversity-Mixture of land uses, housing types, building vernaculars and ways of circulating within neighborhoods 3.

Design-Embodies physical features, site layouts, aesthetics, and amenities that encourage walking, biking, and transit riding 4. Destination Accessibility-Provide convenient way to connect to retail shops, activity centers and other popular destinations such as office buildings in business zone. With the 4 “D”s characteristics of railway based property development, the transit railway will create value to the social community and government in both monetary and non-monetary terms. The major benefits involve: 1. Journey time savings generated by a fast and reliable railway service; 2.

Environmental benefits (air and noise) brought about by a reduction in road traffic; 3. A catalyst to trigger renewal of older districts; 4. The proven “rail plus property development model” will help creating attractive and convenient living environment with better integration with the railway; 5. Increase in the value of properties along the railway corridor; 6. New employment opportunities from potential new tourism and commercial developments. Page 30 of 33 Chan Ming Ko 0900557 Page 30 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1

CHAN Ming Ko Given the high land premium placed on access to fast, efficient and reliable public transport services in the urban area, the residential property value will be further boost up to account for the convenient transportation and the large scale mixed use railway based development. Thus the housing price is generally higher than the neighboring area without the direct access to railway station. According to the comparison figures below between non-railway (Non R+P) and railway based property development (R+P), the housing price difference is ranging from 70% to 110%.

It is seemingly a “Value Added” to a railway based property development in particular for the limited land supply on Hong Kong Island district. To conclude, the medium-term development strategy is to focus on the railway based property development on Hong Kong Island upon the completion of West Island Link and South Island Link. A large scale mixed use railway based property development comprising luxury housing, large shopping mall, hotel and leisure facilities is likely a good profitable choice. [4664 Words] Page 31 of 33

Chan Ming Ko 0900557 Page 31 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Assignment 1 CHAN Ming Ko Construction Markets and Finance Page 32 of 33 Chan Ming Ko 0900557 Page 32 of 33 K107CMF 001 2009/0 Graduate Development Programme Part 1 Construction Markets and Finance Assignment 1 Reference List 1. 2. Hong Kong: Real Estate, October 8 2009, Goldman Sachs CHAN Ming Ko Reports on new railway projects in Hong Kong, February 17 2009, Consulate General of Switzerland in Hong Kong 3. 4. 5. 6.

Hong Kong Luxury Residential, Monthly Report, October 2009, Knight Frank The Knowledge, Market Overview, January 2010, Colliers International Hong Kong Economic Focus, Treasury Section, 2 April 2009, Hang Seng Bank, Hong Kong Global Property Guide, Hong Kong Housing Bubble! Mainland Buyers blamed, 6 November 2009, Residential Property Data Group 7. Rail + Property Development: A model of sustainable transit finance and urbanism, Cervero Robert, 5 January 2008, UC Berkeley-US 8. Lecture note on Housing Policy, Department of Social Administration, 2008-2009, The University of Hong Kong, . Data source from Centaline Property Agency, Hong Kong, Property Price Index and Affordability Index 10. Data source from Ratings and Valuation Department, Hong Kong, Dwellings Completed Units 11. Data source from Hong Kong Monetary Authority, Best Lending Rates 12. Data source from Hong Kong Housing Authority, Public Housing Production Units 13. Census Statistical Department, HKSAR, Unemployment Rate, GDP 14. MTR Future Extension Plans from MTR Website. 15. “HK Housing 2004: Shortage Increasingly Apparent”, Lam, Franklin (2004), UBS Securities Asia Limited 16.

HKSARG (2008), “Housing: Hong Kong: The Facts” retrieved from http://www. gov. hk/en/about/abouthk/factsheets/docs/housing. pdf 17. “How Severe is the Housing Shortage in Hong Kong? ” Reprinted from HKCER Letters, Vol. 42, January, 1997, Wong, Y. C. Richard (1997) 18. “The Construction and Related Industries in a Changing Socio-Economic Environment: The case of Hong Kong”, Charles K. Leung and Kelvin S. Wong (2005), Department of Economics, Chinese University of Hong Kong Page 33 of 33 Chan Ming Ko 0900557 Page 33 of 33 K107CMF 001 2009/0