by Chris Booton
Among the capitalist economies of the world, Hong Kong is in a unique and unenviable position. At a time when other countries, particularly in Eastern Europe, are breaking free from totalitarianism, Hong Kong is faced with the imminent prospect of reincorporation into the communist-led People’s Republic of China. Many businesses, families and individuals, anxious about their prospects after 1997, are seeking alternative homes for themselves and their wealth in other parts of the world.
Present and future patterns of overseas property investment by Hong Kong Chinese depend to a great extent on the developing political situation. Before looking at the impact which Hong Kong money has had, and is likely still to have, on property markets in Canada, Australia, the United States and the United Kingdom, it would be useful to look at the background in more detail.
Hong Kong’s growth has depended on trade. With the advantages of a large natural harbour, a liberal commercial environment, a tremendous entrepreneurial spirit, access to western capital and a cheap labour force, the colony has thrived. In the main it has relied on the import and re-export of manufactured items, although domestically produced exports are also important. More recently service industries, particularly within the financial sector, have become major generators of revenue.
After a period of relative weakness, the Hong Kong economy started to grow again in 1987, with expansion continuing into the first part of 1989. Growth was suddenly checked again in June, with the suppression of the Tiananmen Square demonstrations in Peking. Since then, there has been virtually no growth at all. At the same time, the exodus of private capital has increased massively, to stand at about $HK 22,400m for 1989 as a whole.
Unlike some other parts of the world, the family is central to business life in Hong Kong: The great bulk of commercial enterprises is family owned and controlled. This reflects the social structure of Chinese society, which is based very firmly on the family unit. As a result of their business activities, many families have accumulated great personal wealth.
The Joint Declaration of the British and Chinese governments on the question of Hong Kong, which became effective in May 1985, provides for the return of Hong Kong to the Chinese government on July 1 1997. From this date, Hong Kong will become a Special Administrative Region of the People’s Republic of China, with its own system of government and its own basic law, which is intended to remain in place for the next 50 years.
The Tiananmen Square incident crystallised the distrust felt by many Hong Kong Chinese about the Chinese government’s ultimate intentions after 1997. Since mid-1989, many individuals, families and businesses have increased their efforts to find an alternative home outside Hong Kong.
Factors influencing overseas investment
In the light of the political situation, the single most important factor affecting overseas property investment decisions is the possibility of emigration to the destination country. Total emigration from Hong Kong was about 42,000 last year, having doubled over the previous four years. The figure is expected to rise to about 55,000 this year. Taking all destinations into account more than 500,000 people could leave Hong Kong by 1997.
If free choice were allowed, the United States would be the most popular destination. The USA currently allows up to 5,000 people a year to come in from Hong Kong, although this could be increased shortly to 10,000 or even 20,000. The waiting list of Hong Kong Chinese seeking to emigrate to the USA is about 50,000.
Canada has so far taken the largest number of Hong Kong Chinese, followed by Australia. Both countries have an immigration system based on family ties, and professional and business skills rather than quotas (although informal target levels may now be applicable to Canada). Canada issued about 22,100 visas to Hong Kong Chinese last year, and Australia granted about 10,500 residents’ permits over the same period. Australia expects to increase its immigration from Hong Kong to about 16,000 this year.
The United Kingdom is currently finalising legislation to give 50,000 heads of households UK passports. This policy is specifically designed to secure the position of key government and business personnel in Hong Kong, and to encourage them to stay. In total, about 225,000 ethnic Chinese could be affected.
Canada, Australia, the USA and the UK are all regarded as socially and politically stable. The presence of sizeable Chinese communities in several cities in each country is an added attraction, although links between existing communities and more wealthy Hong Kong Chinese can be limited.
In common with many Asian peoples, property ownership has a peculiar allure to Hong Kong Chinese. Nevertheless, they will not generally buy commercial properties at any price, but look for the best returns in the short to medium term. Hong Kong money may prove to be fairly mobile between different cities and countries, depending on the market situations in each. Generally, unless there are special circumstances, minimum initial yields have to be at least 8% to make a property attractive.
Wealthier Hong Kong Chinese will continue to use diversification as a tool of investment policy. Nevertheless, for most Hong Kong Chinese investors, particularly those whose primary property interest is an alternative home for their family, diversification (except out of Hong Kong) is not a relevant issue.
Canada
The story of property investment by Hong Kong Chinese into Canada is increasingly becoming Vancouver’s tale.
The first sizeable Cantonese Chinese community in Canada was established in Vancouver at the start of the present century by immigrants who had originally arrived there to assist with the construction of the Canadian-Pacific Railway. Today, there are about 300,000 ethnic Chinese in Toronto and about 225,000 in Vancouver, as well as smaller numbers in other cities such as Montreal, Ottawa and Quebec.
There has been a tendency for wealthier Hong Kong Chinese to gravitate towards Vancouver, while younger, often professionally qualified, Hong Kong immigrants have been attracted to Toronto. Over the past two years, Vancouver has taken in between a quarter and a third of all Hong Kong Chinese immigrants to Canada.
Hong Kong property investment into Canada has come in waves, beginning during the Cultural Revolution in mainland China, when a number of wealthier families acquired passive residential and retail investments in Toronto and other major Canadian cities. In the late 1970s and early 1980s, the second wave of inwards investment brought Hong Kong property companies into the development market. Typically, these companies took on small- and medium-sized projects outside the prime CBD areas.
Representative transactions in Vancouver dating from this period include Broadway Plaza at 601 West Broadway (said from the air to resemble a dice, since the owner originally came from the gambling colony in Macau), Stanley Park Place and Alberni Place. There were a number of similar schemes in other cities, particularly Toronto.
The third wave of inwards property investment began far more recently, with the need for many Hong Kong residents to find alternative homes in the remaining years before 1997. As a consequence, a considerable amount of money in this wave is directed towards residential property. Nevertheless, the Business Immigration Programme has ensured a continuing interest in the commercial property sector.
The present wave has coincided with the rise of Vancouver as the primary property investment destination in Canada. Vancouver, with its orientation towards the Pacific Rim, has been growing particularly fast over the past decade. The city hosted the International World Exposition in 1986 and it has also been selected as a North American headquarters location by several substantial Asian companies, including the Hong Kong Bank of Canada (a subsidiary of the Hongkong & Shanghai Bank) and Cathay Pacific Airways. The provincial government in British Columbia has actively encouraged inwards foreign investment.
The single most notable property transaction in Vancouver involving Hong Kong money was the acquisition of the 84-ha downtown site of Expo ’86 by Li Ka-Shing in 1988 for about $C260m. Li Ka-Shing is one of the more highly regarded and successful entrepreneurs in Hong Kong, and his purchase of this site was a major boost both to Vancouver and to the confidence of other Hong Kong property investors. The site will be redeveloped for a mixture of commercial, residential and leisure purposes.
Other significant transactions involving Hong Kong Chinese money have included the Hotel Georgia, a 314-suite hotel in the downtown area ($C50m to $C60m), and the Lansdowne Shopping Centre ($C80m). These larger deals have been underpinned by a whole raft of smaller transactions, typically concerned with retail and condominium buildings and usually in the $C5m to $C15m size range. In total, Vancouver now attracts about 60% of all commercial property investment into Canada from Hong Kong. Hong Kong investors are estimated to have spent over $C2bn in Vancouver so far, which has left them owning about 7% of the downtown area.
For the future, several Hong Kong investors now perceive the commercial property market in Vancouver to be overheating. In other Canadian cities, there are concerns about overspill from impending USA sale and leaseback sales affecting capitalisation rates. These sentiments may reduce the pace of new commercial property investment into Canada as a whole, although residential sales are not likely to be affected so much.
Australia
As the emigration figures suggest, Australia has not yet proved so popular a destination as Canada for inwards property investment by Hong Kong Chinese.
This in part reflects the more limited number of investment opportunities in Australia, and the low yields which have until very recently been attached to commercial properties virtually right across the board. Today, with the Australian property market going through difficult times, a few more adventurous commercial investors are beginning to look at the possibilities in Sydney and Melbourne. So far, the emphasis has been very much on recovery situations, with yields of 8% and over required.
In the residential sector, 1989 saw a significant increase in activity, even if the total volume of purchases by Hong Kong Chinese remained very low. The seven Australian banks represented in Hong Kong reportedly provided housing loans to some 1,500 applicants to enable them to acquire homes in Australia.
The level of future investment into Australian property by Hong Kong Chinese will depend to a great extent on the health of the various Australian property markets. The general view at the moment is that there are further falls to come, but once the bottom has been reached, then Hong Kong-generated investment activity may rise.
United States of America
To date, despite the presence of significant ethnic Chinese communities in San Francisco, Los Angeles, New York, Boston and, to a lesser extent, in Chicago and Houston, the amount of inwards investment into the USA by Hong Kong Chinese has been restricted by USA immigration policy.
As might be expected, the West Coast has attracted the bulk of inwards property investment into the USA, with San Francisco and Los Angeles proving the most popular cities. Typically, Hong Kong investors have concentrated on income-producing apartment or retail investments, usually in the $5m to $15m range. So far, there have not been any transactions on the scale of Li Ka-Shing’s acquisition of the Expo ’86 site in Vancouver.
Following the Tiananmen Square demonstrations, there has been an increasing interest in other cities away from the West Coast. For the most part, as with Australia, attention has focused on recovery situations. Several Hong Kong Chinese investors are known to be studying the situation in Seattle, Dallas and Houston.
For the future, the level of investment in both commercial and residential property will depend critically on USA immigration policy towards Hong Kong. If this is relaxed, then there could well be much higher levels of acquisition in the years running up to 1997, particularly if USA property markets start to improve again in the mid-1990s.
United Kingdom
To date, property investment by Hong Kong Chinese into the United Kingdom has been relatively low-key. Despite political and governmental connections with the colony, the UK has not had the same attraction for Hong Kong nationals as Canada, Australia and the USA.
Looking specifically at commercial property, the majority of Hong Kong investors have been content to watch as UK property markets have slowed down. While central London has the required international appeal, its property markets are seen to be either too expensive, too complicated or too uncertain. Over the past few months, however, interest has started to increase as well-secured, higher-yielding commercial opportunities have become available.
In the residential sector, many UK housing developers have been directing their sales efforts towards Hong Kong. The Colliers Group has established a marketing operation in Hong Kong geared specifically to selling UK residential property to Hong Kong Chinese. Over the course of the past year, business has been expanding very quickly.
Activity in the residential sector is expected to increase further once the British Nationality (Hong Kong) Bill becomes law.
For the future, there are encouraging signs that the level of interest by Hong Kong Chinese in commercial property is improving. UK investment yields, particularly in the central London area, have now risen sufficiently to make some properties attractive. Specific areas have been linked with Chinese investment, including Poplar Dock, where Olympia & York, the Tianjin Municipal Government and the Imperial Land Group have formed a joint venture to develop China City. The majority of potential Hong Kong investors, however, are likely to look at more mainstream situations.
Conclusions
The close of British dominion in Hong Kong could witness a significant migration of ethnic Chinese away from the colony to other parts of the world. This is unlikely to be a mass exodus by an unprepared people, but an orderly departure by a sophisticated and wealthy group who will have already established a position for themselves overseas.
A considerable amount of private capital has already left Hong Kong, some of it directed towards real estate in Canada and other parts of the world. During the course of the next few years, the rate of overseas property investment seems set to increase, and the geographic spread of acquisitions is also likely to expand to include Australia, the USA and the UK to a much greater extent.
