COMMENT: Are Hong Kong property tycoons China's next target?

·3 min read
This picture taken on January 15, 2019, shows a taxi (C) drive past high density apartment blocks in the central district of Hong Kong. - The crammed financial hub regularly tops the list of cities with the least affordable housing in the world, with even cheap apartments out of the reach of most regular workers. (Photo by ISAAC LAWRENCE / AFP) / TO GO WITH: Hong Kong-property-economy-lifestyle, FOCUS by Jerome TAYLOR, Yan ZHAO        (Photo credit should read ISAAC LAWRENCE/AFP/Getty Images)
It’s only a matter of time before Beijing targets Hong Kong's red-hot property market under its common prosperity campaign. (PHOTO: ISAAC LAWRENCE/AFP/Getty Images)

By Shuli Ren

(Bloomberg Opinion) — For anyone who wasn’t paying attention, China is serious about its common prosperity drive. Aiming to rein in billionaires and reduce income inequality, regulators have cracked down on tech giants and mainland real estate developers alike, costing shareholders over US$1 trillion along the way. Last week, officials set their eyes on the territory of Macau, the world’s biggest gambling hub. Can Hong Kong’s property tycoons remain unscathed much longer?

Investors don’t seem to think so, and Monday’s selloff was swift and brutal. The city’s big four developers, Sun Hung Kai Properties Ltd., CK Asset Holdings Ltd., Henderson Land Development Co., and New World Development Co., all tumbled to their lowest level since 2016. Having witnessed what happened to China’s education stocks, another sector in the crosshairs, and Macau’s casino shares, investors are selling first, and asking questions later.

The share moves come after reports that China asked the territory’s real estate billionaires to resolve the city’s housing crisis. Some officials in Beijing have blamed Hong Kong’s protests in 2019 on its sky-high home prices, which fuelled resentment among the youth. The city was ranked the world’s least affordable housing market for the 11th year, according to a report put out by two think tanks. So what’s next for Hong Kong?

Sell-side analysts are preparing for doomsday scenarios: What if developers have to donate all of their (rather substantial) agricultural land holdings to the government? What if they are required to sell all of their future residential land banks at cost? Hong Kong’s limited land supply is a big problem that the government has been slow to address. Only about 6.9% of its land is available for housing development, while agriculture accounted for another 6.1%.

Did investors overreact? Over the years, the territory’s real estate developers have diversified, to mainland China and beyond. New World Development and CK Asset and have just 14% and 16% of their net asset value exposed to Hong Kong residential property, estimates JPMorgan Chase & Co.

(By Bloomberg Opinion)
(By Bloomberg Opinion)

Catch the falling knife at your own risk. We knew that the rules of the game had changed as early as July, when Beijing put ride-hailing giant Didi Global Inc. under regulatory review after it defied warnings and went ahead with its U.S. initial public offering. China no longer sees shareholder capitalism serving the nation well; now, it’s going for stakeholder capitalism, where customers, employees and even local governments all have a say in how companies do business and retain their earnings.

Soaring home prices are becoming a political problem around the world. In China, out of desperation, some cities with red-hot housing markets have instituted price controls. Across the border, in the Tier-1 cities of Guangzhou and Shenzhen, local governments launched price reference systems for existing home sales. If, for example, you can sell your apartment for US$1 million, but your buyer can only get a bank mortgage based on the suggested sale price of US$500,000, the buyer will have to shell out a much bigger down payment. This reduces demand and dampens home prices.

Amid China’s regulatory crackdowns and stock selloffs, real estate developers in the blue-chip Hang Seng Index had been fairly immune, down only 15.5% year-to-date, versus the Hang Seng Tech Index’s 26.7% tumble, and Macau casino operators’ 46% bloodbath. That seems too good to be true. China’s whip is coming for Hong Kong’s property billionaires, too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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