Why HK is a distribution center for property projects worldwide

June 03, 2019 11:17
It is estimated that Hongkongers own a total of HK$700 billion in foreign property, or about a quarter of a year’s worth of GDP.  Photo: Reuters

According to a recent study by Citibank, Hong Kong has 511,000 residents with at least HK$10 million (US$1.28 million) in assets. These ten-millionaires hold, on average, 1.9 properties in Hong Kong, 0.6 property in mainland China, and 0.7 property overseas.

The asset allocation of these ten-millionaires is roughly 70 percent in real estate. We suspect that the high percentage is partially due to the relative price gains of real estate in recent years. This both attracts additional capital into the system and makes existing investment a larger percentage of an investor’s overall allocation.

As large institutional investors often hold only up to 20 percent of their assets in real estate, over the long run, Hong Kong investors would probably continue to divest into equity and bonds, supporting their long-term development.

Nonetheless, this set of data provides circumstantial evidence of why Hong Kong has evolved into a distribution center for property projects around the world. An average of 0.7 overseas property means that the most well-off 10 percent of Hong Kong population collectively holds 351,000 overseas property units.

Assuming that the city spent 10 years to accumulate these units, it would mean that every week there were at least 70 sales.

Granted, less wealthy Hongkongers have also bought overseas properties. Some people have also purchased their units without going through Hong Kong-based agents. Thus, the above weekly sales figure is only a back-of-the-envelope calculation. However, this number serves to show the depth of the Hong Kong market.

It is, thus, no surprise that during the peak seasons of February to May and September to November, almost every week conferences are held at local hotels to showcase overseas properties.

Some overseas property developers have placed so much emphasis on the Hong Kong market that sometimes they have released units in Hong Kong before they do in the local markets. We heard that, in one particular situation, this has attracted complaints from the local residents, as they wanted to have the first pick.

Collectively, owning overseas properties represents a significant investment diversification for Hong Kong as a whole. Hong Kong’s gross domestic product in 2017 was HK$2,660 billion (US$341 billion). While it is quite difficult to find the average value of the overseas holdings, using a rough estimate of HK$2 million per unit will mean that Hongkongers own a total of HK$700 billion in foreign assets, or about a quarter of a year’s worth of GDP.

The amount of cash income generated from this portfolio (akin to the free cash flow in an accounting or finance setting) can be as high as one percentage point of Hong Kong’s GDP. This level of cash income can significantly stabilize our local asset markets should there be a short-term economic shock.

Several hundred years ago, when Venice was a significant trading power, its citizens also owned a substantial portfolio of foreign assets in different port cities around the Mideterrean Sea. The foreign portfolio had generated significant income for the Venetian merchants, and the process of acquiring and then managing portfolio had also given much-needed market intelligence for the city.

Similarly, Hong Kong’s ownership of foreign assets, including both the overseas properties and other means of production, is a competitive advantage.

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Chief Investment Officer, Admiral Investment Ltd.