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Compared to Hong Kong, where have mainland developers seen cycles - Huxiu#

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Compared to Hong Kong, where have mainland developers seen cycles#

This article is a reading note and reflection on three crises in Hong Kong's real estate development. The author, Peter Zhang, explores the development cycles and crisis impacts of the Hong Kong real estate market through historical data and case studies.

• 📉 The Hong Kong real estate market has experienced three major crises, each leading to a significant drop in property prices and rents.

• 📈 Before each crisis, the Hong Kong real estate market had seen substantial growth, but the declines during the crisis periods were shocking.

• 🔁 Historical data shows that the Hong Kong real estate market has a cycle of about seven to eight years, but this cycle was broken after 1984, resulting in longer periods of both growth and decline.

This article is a part of the reading notes and reflections on "The History of Hong Kong Real Estate," written to deepen the impression.

Mr. Feng Bangyan is a professor and doctoral supervisor at the School of Economics, Jinan University in Guangzhou. From 1987 to 1994, he was invited to Hong Kong to serve as an economic analyst at the Southeast Economic Information Center. From 2000 to 2007, he was the director of the Macao and Hong Kong Economic Research Institute at Jinan University.

He has long been engaged in research on Hong Kong's economy, capital markets, real estate, and the history of conglomerates. In 2001, he wrote a well-known book titled "A Century of Hong Kong Real Estate," which was recommended by many predecessors. In 2021, he updated the history of the last 20 years based on this work, renaming it "The History of Hong Kong Real Estate (1841-2020)."

The thick book, surprisingly, is not dull; it is highly readable, with reports, stories, images, and data... Unless otherwise noted, the data cited in this article comes from this book. Although most Hong Kong real estate companies went public in the early 1970s, the data on listed companies disclosed by the Hong Kong Stock Exchange website only became available after 1999, making the data and cases compiled in this book even more valuable.

The book covers a span of 179 years from the opening of Hong Kong in 1841 to 2020. During the 75 years from the end of World War II to the present, Hong Kong's real estate industry has experienced seven cyclical cycles. Before the 1984 Sino-British Joint Declaration, all rises and falls were roughly on a seven to eight-year cycle, with about five years of growth and two to three years of decline. Although the reasons varied, the time cycles were remarkably consistent.

After 1984, this seven to eight-year cycle was broken. From the Sino-British negotiations to the aftermath of the Asian financial crisis, this cycle lasted eighteen years, with thirteen years of growth and five years of decline, marking the longest period of decline in the 180 years since Hong Kong's opening. From 2003 to 2019, there was a bull market that lasted for sixteen years.

During this entire period, there were three significant real estate market crises, each bringing about price and rent declines exceeding 50%. Before each crisis, there was indeed substantial growth, but if we focus on the periods of crisis and place these three severe crises within a historical context, the situation is as follows:

1. The real estate crisis of the mid-1960s

The real estate cycle of the 1960s lasted about eight years, with the first five years being a growth cycle and the last three years a decline cycle. The growth period began in the early 1960s, following the Korean War in the early 1950s, when Hong Kong's population grew from 2 million in 1950 to 3 million in 1960. At the same time, the light industry and processing export sectors flourished, with the number of manufacturing firms increasing from 2,944 in 1965 to 8,941 in 1966, more than doubling, and the number of workers rising from 129,000 to 347,000.

The real estate sector also thrived, with the number of real estate companies increasing from around 500 in the 1950s to 2,000 by the mid-1960s, nearly quadrupling. The developers we know today were also established during this time, as they were digging for their first pot of gold in the industrial sector. By 1965, the famous "Hong Kong Real Estate Developers Association" was established, with Ho Ying Tung, who "invented" the installment payment system for selling properties around 1953, serving as its first president.

Originally, everyone was developing in harmony, but around 1965/1966, Hong Kong experienced a severe banking crisis. At that time, banks had no reserve requirements for loans and were aggressively lending to the rapidly developing real estate market while raising interest rates to earn more.

The first case of a bank run occurred in 1961 at Liao Chuangxing Bank, which was later taken over by HSBC for a time before stabilizing. However, by 1965, it became uncontrollable, with Ming Tak Bank and Guangdong Trust Commercial Bank experiencing runs, and even Hang Seng Bank faced a serious run, being forced to sell 51% of its shares to HSBC.

The bank runs led to severe loan withdrawals from real estate projects, and the decline in real estate further exacerbated the banks' bad debts, putting them under financial strain... How severe was this crisis?

By 1965, 800 real estate projects were forced to halt due to funding difficulties; the government's land sale revenue that year was HK$75.86 million, down 47% from the previous year's HK$143 million, and continued to decline by 33% in 1966. In the residential market, for example, in Causeway Bay, both ordinary and luxury residential prices dropped by about 40% within a year. In the office market, rents for Central office buildings fell by 40% in 1965, and by 1996, they continued to decline, with prices per square foot dropping from HK$2,000-2,500 to HK$600-800 in 1966, a decline of 70% in just over a year.

By 1967, due to the anti-British movement of 1966-67, the market was further exacerbated. The movement began in May, and by August, many wealthy individuals had fled, with luxury apartments dropping from HK$130,000-140,000 to HK$40,000-50,000 in just six months. In late August, a piece of land in Wan Chai was auctioned for HK$50 per square foot, down from HK$100 at the beginning of the month, representing a 50% drop in just one month. Even more dramatically, in October, a piece of land on Des Voeux Road in the core Central area was auctioned for HK$100 per square foot, down from HK$1,000-1,200, a sudden drop of 90%. Although there were liquidity issues and some individual cases, this sufficiently illustrates how severe this short-term crisis was.

It is worth mentioning that the main players in Hong Kong's real estate at that time were still foreigners, with the Land Development Corporation being the leader, while the Chinese developers we know today seized the opportunity to acquire land and merge during this cycle, laying the foundation for future development. In terms of grasping the cyclical development of the market, Chinese developers were clearly more adept, with Sun Hung Kai and Cheung Kong being particularly good at timing the cycles, while Hang Lung made a small misstep during this era, failing to complete sales before 1976, tying up a large amount of capital and missing the opportunity to acquire land at low prices.

2. The real estate crisis of the early 1980s

The Hong Kong stock market experienced a bull market in the early 1970s, known as the "Four Associations Era." During this super bull market, the Chinese developers we love to see went public during this same period. For example, in just the last six months of 1972, developers such as Sun Hung Kai, Hang Lung, Eagle Asset, Cheung Kong, New World, Sino Land, and Wing Tai went public... In the following years, the market entered various bear markets characterized by "oil embargo + inflation + stock market crash + real estate crash," which came quickly and left just as fast, gradually recovering by 1975.

After that, the real estate market entered a seven-year growth cycle. During this period, Hong Kong's light industry rebounded rapidly, and the economy transformed, with the financial services sector gradually developing. The population grew from 4 million in the early 1970s to over 5 million by 1980. With the mainland's reform and opening up in 1978, Hong Kong's role as a bridgehead became increasingly clear, and foreign investment began to flow in. From 1975 to 1981, the average annual GDP growth rate in Hong Kong exceeded 10%, marking a period of rapid development.

Against this backdrop, the real estate market also flourished, with the monthly rent for Grade A office space rising from HK$6 per square foot in 1974 to HK$21 in 1981, more than tripling in seven years. In Central, the monthly rent for Grade A office space reached HK$30 per square foot, a significant increase. Speculative activities in real estate were rampant, with the Kim Man Building changing hands three times in a year, going from HK$715 million to HK$1.68 billion, a doubling in price in just one year, reflecting the market's madness at that time.

Then, the market entered a three-year real estate crisis. There were multiple causes, including objective market factors. After seven years of soaring prices, residents and businesses were already under heavy burdens, with the vacancy rate for newly built residential units reaching 41% in 1980. At the same time, inflation was at 15%, and mortgage rates were at 20%, which was not conducive to speculation. However, another unavoidable reason was the Sino-British negotiations that began in 1982. The Iron Lady, Margaret Thatcher, famously slammed the table at the Great Hall of the People, and various factors combined to trigger this crisis.

How severe was the three-year crisis? For instance, land prices in 1982 fell by 40%-60% compared to 1980, and the phenomenon of land auctions failing to attract bids continued until 1984. In the residential market, prices dropped by 30%-40% in 1982 alone compared to the previous year. In the office market, the monthly rent for Grade A office space in Central, which was HK$20-30 per square foot in 1981, fell to HK$21-24 by the end of 1982, a decline of over 20% in one year. The overall vacancy rate for office buildings in 1982 reached 17.6%.

On the developer side, the well-known speculative developer, Kwan Hung Group, went bankrupt, and Yida Investment underwent debt restructuring, which even affected the Land Development Corporation, leading to its first loss of HK$1.58 billion. The "leading position" of the Land Development Corporation was shaken during this cycle.

Chinese developers, particularly Hang Lung, once again misstepped. Before 1982, they had just acquired nine subway station properties on Hong Kong Island, but after 1982, they faced a severe real estate crisis, with tight cash flow and banks withdrawing loans, making it impossible to gather the funds for land payments. They had to default on the land parcel for the second phase of the Admiralty Station project, losing HK$400 million in deposits. This land was later acquired by Sino Land and eventually sold to Australia's Benda Group in 1987, which soon went bankrupt and was sold to Indonesia's Li Po Group, becoming the current Lippo Centre in Admiralty. Although the building is unattractive, one wonders what Mr. Chen thinks after all these years...

After this battle, Hang Lung was severely wounded, and the market recovery came too early... They made mistakes both internally and externally... falling behind other Chinese developers, and once the cycle passed, they could never catch up.

3. The real estate crisis from the late 1990s to the early 2000s

After the last crisis ended in 1984, the future of Hong Kong became clear. After 22 rounds of negotiations, the Sino-British Joint Declaration was signed and published in December 1984, coming into effect in May 1985. This also marked the beginning of a thirteen-year bull market in Hong Kong's economy and real estate development, from the effectiveness of the Joint Declaration to the official handover on July 1, 1997, referred to as the "transition period."

The entire thirteen-year transition period was marked by a dramatic rise, influenced by various factors, including:

1. In terms of economic development: From 1986 to 1988, the annual real GDP growth exceeded 10%. By 1989, Hong Kong's per capita GDP surpassed US$10,000, ranking first among the "Four Asian Tigers," and by 1994, it exceeded US$22,800.

2. In terms of development structure: By the early 1980s, Hong Kong had become the world's third-largest financial center, with an economy dominated by the financial services sector. Traditional light industrial manufacturing firms gradually relocated their factories to Guangzhou and Shenzhen, leaving the land in Hong Kong for real estate development.

3. Political stability: The Joint Declaration affirmed the legality and validity of previous land grants and extended the free renewal of New Territories land until 2047. This alleviated market concerns, and with the reform and opening up in 1978 and Deng Xiaoping's southern tour in 1992, the prospects for market-oriented development in the mainland became increasingly clear. Hong Kong's role as a bridgehead, entrepôt trade center, Asian financial center, and offshore RMB trading center became more significant. The population continued to flow in from the mainland and around the world.

With the interplay of various factors, from 1987 to 1997, the private residential price index rose from 65 to 420, a 6.4-fold increase; the private office price index rose from 41 to 206, over 5 times. The monthly rent for office space in Central rose from HK$31-35 in 1987 to HK$55-62 in 1988, and approached HK$90 in 1994, making office prices the highest in the world. Thus, the entire real estate bubble peaked just before the handover on July 1, 1997. This peak level was not surpassed even at the high point of the next cycle, taking over a decade until around 2011 to gradually digest.

The height of the bubble before Hong Kong's return in 1997 also determined the depth of this round of crisis, lasting a full five years, making it the longest real estate bear market to date.

Coincidentally, on July 2, 1997, the day after Hong Kong's return, Thailand announced the abandonment of its fixed exchange rate system with the US dollar, leading to a free float of the Thai baht and the onset of the Asian financial crisis. The Hang Seng Index plummeted from a high of 16,673 points in August 1997 to 6,600 points in August 1998, a 60% drop in just one year! It is truly unimaginable in hindsight.

Tung Chee-hwa also had bad luck; at the beginning of his term, he proposed the "85,000" plan, aiming to supply 85,000 housing units annually, including 35,000 for private housing and 50,000 for various policy housing programs. This coincided with the Asian financial crisis, leading to a sharp decline in property prices. Not only was the ambitious "85,000" plan shelved, but he was also criticized for many years because of it.

Within the real estate market, from August 1997 to August 1998, commercial properties fell by 30-40%, luxury homes by 40-50%, and developers slashed prices to survive, further promoting declines... Although Hong Kong managed to safely land after the 1997 financial crisis, it soon faced the burst of the internet bubble in 2000, the 9/11 attacks in 2001, and SARS in 2003...

During the entire period from 1997 to 2003, private residential prices fell by 60%, office prices fell by 70%, office rents fell by 50%, retail property prices fell by 50%, and retail property rents fell by 30%... By 2003, the overall vacancy rate for office buildings reached 14%.

In this process, many speculative groups went bankrupt, such as the so-called "child prodigy" Luo Zhaohui, who speculated on properties to the point of buying a listed company to continue speculating, later going bankrupt and attempting suicide. Hong Kong star Anthony Wong bought multiple luxury homes in 1996 but could not hold on by 2001 and declared personal bankruptcy in 2002. Diva Faye Wong even bought a HK$48 million luxury home in the first half of 1997 with 70% financing, with a monthly payment of HK$290,000, but later tried to sell it for HK$25 million at half price, yet could not sell it.

For ordinary residents, the drop in property values far from covered their loan amounts, turning them into a negative asset group. According to statistics from the Financial Management Bureau, by June 2003, negative equity mortgages accounted for as much as 22% of bank mortgage loans, putting the banking system at risk.

4. Epilogue: From the early 2000s to the present

This review focuses on crises rather than bull markets, thus overlooking many other aspects. In fact, after the aforementioned crises, the Hong Kong real estate market truly entered a bull market that lasted for fifteen years, with various property prices gradually exceeding the peak levels of 1997 after 2010, rising to the familiar levels we see today. As shown in the figure:

The reasons can be simply divided into supply and demand:

The main reason on the supply side is the unfavorable policy system, which has suppressed the supply of land and housing.

By 2003, the then Secretary for Housing, Planning and Lands, Sun Mingyang, proposed extreme measures known as the "Nine Proposals," which included two core points: first, indefinitely halting regular land auctions, allowing land supply only through "land grants"; second, abandoning various public housing and home ownership schemes, letting the government withdraw from the real estate market's supply-demand relationship. The previous "Home Ownership Scheme" by the SAR government officially ended after 25 years in 2002.

After the "Nine Proposals" were clarified in 2002, land supply was scarce until 2013 when Leung Chun-ying took office as Chief Executive. Over the next ten years, there was very little land supply. Although Leung hoped to increase supply, he did not achieve it, and neither did Carrie Lam later... The reasons are certainly multifaceted, and I cannot truly understand them, so I won't speculate. In any case, from the results, according to data disclosed by the Hong Kong Planning Department, by the end of 2021, Hong Kong had a total land area of 1,117 square kilometers, with the utilization results as follows:

On the demand side, apart from the stable development of the international environment, the friendly enthusiasm of the American people, and the global interest rates being in a long-term declining trend for forty years, the most significant factor undoubtedly comes from the rapid economic rise of mainland China. Starting in 2003, China opened up to Hong Kong through the "Closer Economic Partnership Arrangement" (CEPA), indirectly promoting the recovery of the Hong Kong market and economic linkage across the strait.

In fact, the economic rise of the "Chinese miracle" officially began after 2000. On one hand, China finally joined the WTO in December 2001, initiating two decades of manufacturing exports... On the other hand, the tax reform in 1994, housing reform in 1998, and the emergence of the first batch of commodity housing around 2000... The subsequent story needs no further elaboration.

On the other hand, Hong Kong has always had limited land. Including the various mountains in the New Territories, the total usable land area is equivalent to just over two Chaoyang Districts. In the context of development linked to the mainland, the influx of population is an undeniable factor.

The above lists the population changes from the opening of Hong Kong in 1841 to June 30, 2023, with varying time intervals. The data before 1961 comes from this book, while detailed data from 1961 onwards is available from the Hong Kong Census and Statistics Department. I selected several years that I consider important.

By closely examining the years, one can understand that each instance of international turmoil, each instance of unrest in the mainland, and each instance of development in the mainland has led to a continuous influx of population into Hong Kong... Just as netizens say, every event is favorable for Moutai. This trend continued until 2019. Since the SAR Census and Statistics Department has disclosed more detailed data since 1961, we might as well take a look:

Reflecting on this, I can't help but marvel again. I have pieced together these cycles of rise and fall, and it wasn't until after 2003 that the Hong Kong market seemed to settle down, while the mainland only began tax reform in 1994, housing reform in 1998, and the emergence of commodity housing around 2000, developing for just over twenty years now...

Perhaps as Chen Qizong said, mainland developers have never seen cycles. As someone born in the 1980s, I can hardly imagine a year when property prices fell by 50%, yet this has happened more than once in Hong Kong just over twenty years ago. Of course, today's mainland China and past Hong Kong have a hundred different characteristics and reasons, and it is not our intention to seek a one-size-fits-all solution, but reading history always yields insights.

It is evident that reading more is beneficial.