Hong Kong: Accommodation Value US$5,400 / ft2 Expensive?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

January 2007

In a recent December 2006 government land auction involving a prime residential site on The Peak neighborhood of Hong Kong, the market was surprised to see a final sale price per floor area permitted, or Accommodation Value, i.e. roughly the land price divided by the allowed floor area to be built on the site, reaching HK$42,000 or US$5,400 per ft2. Immediate market anticipation was that not only the new property-to-be needs to sell for around HK$56,000 / ft2 or US$7,000 / ft2 to enable the winning developer to be at least reasonably compensated, the world record sale price per ft2 would also induce the luxury residential sector to see further price rises.  

Given a good economy and that many people in the financial markets and industries have made real money in the last couple of years, finding say 20 or 30 odd buyers for the new homes-to-be, expected to range in the 3,000 ft2 and above floor sizes, should not be overly difficult. Furthermore, The Peak is not just your ordinary luxury neighborhoods, it signals being the top of the top, and it is physically on one of the highest peaks on Hong Kong Island side. This is REAL LUXURY, not some of the recent ¡¥advertised¡¦ luxuries. The average price for the new homes is expected to hover around HK$200,000,000 and up, or roughly US$25M or up.  

Nonetheless, on the issue of whether this (land sale) would support a general price rise in the luxury residential sector AND sustain it, this requires looking at the sector as a whole rather than just focus on one single project. First, there is always the difficulty of defining luxury residential real estate. Ask 10 appraisers and you get 10 different replies. Perhaps we may look at it this way: Hong Kong has around 2M homes and around 1M of these are public or public assisted housing. Discount them and this leaves another 1M so-called private market homes. IF we were to use top 1% as the demarcation, then the luxury sector would have 10,000 homes, 1/2% would mean 5,000 homes, 1/4% would be 2,500 homes, and so on. Let us be a bit bold (and rough) and use 1/10% i.e. the top 1,000 homes. Second, ask yourself this question: IF these 1,000 homes are now priced to the HK$56,000 / ft2 or roughly US$7,000 / ft2 range with adjustments for different attributes, can their current owners afford them i.e. assuming they have not yet bought them? IF the answer (or wild guess) is a Yes, then we may see a general price rise sustainable. IF on the other hand the guess is a No, then any price rise may not hold or even not occur at all.  

Naturally, the above question is easier to ask than to investigate, the latter action in turn would imply much data collection and research, assuming it is possible to collect viable detail data. In any event, this same question of ¡§Can the current owners afford the current prices?¡¨ can be applied to any market segment and offers a quick and easy way to guess IF the market price is out of range or within it. The fact that 20 or 30 new prospective buyers can afford the price does not automatically imply the rest of the 1,000 current owners can do the same

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