Issue 01 - 2023MAGAZINEReal Estate
GBO_ Hong Kong

Why Hong Kong elites are buying property in Japan

As interest rate hikes are devastating the yen and the property markets in Hong Kong, the super-rich are investing in Japanese real estate

In August 2022, a group of Hong Kong purchasers went to Tokyo for the shopping trip of a lifetime: a real estate bargain hunt propelled by the historically weak yen, the Bank of Japan’s unshakeable insurance policies, and sushi priced at $440 per person.

The tour, organized by Hong Kong-based property brokerage JP Invest, came in the wake of a spike in interest from hedge funds and wealthy buyers looking to capitalize on the sudden drop in the yen value to a 24-year low.

A premium car dealership in the exclusive Azabu-Juban neighbourhood known for selling antique Porsches for around $600,000 was among the souvenirs purchased by retail and institutional buyers on a tour of Tokyo, taking advantage of the yen’s 20-year low against the US dollar.

The trip costs HK$128,000 ($16,300) per person. It included nights at the Aman hotel in Tokyo’s Otemachi business district, the traditional Gora Kadan onsen in the nearby spa town of Hakone, and a seven-day hotel quarantine package in Hong Kong after that. Meals included a reservation at Ginza’s Sushi Yoshitake, a 13-seater, a three-Michelin-star eatery known for its abalone in a sauce made from its liver.

On the wealthy package tour, flown across the Japanese metropolis in a chauffeured Bentley, participants were expected to focus on the post-pandemic opportunities in the Tokyo real estate market. Analysts predict that cash-strapped hotels built/renovated before the tourist-free Olympics, which have sat virtually unoccupied since 2020 would be particularly interesting.

Sachiko Okada, a Japanese real estate analyst at Goldman Sachs said, “Hong Kong-based real estate funds and private equity are expecting a revival in Japan’s inbound tourism story, and they see this as a good chance to buy hotels. They may now physically travel to Japan to view the homes and make investment decisions. Moreover, it is simple to invest because the interest rate is low.”

According to Kelvin Chung, director of JP Invest, the company receives eight to ten inquiries a day and ran its first such tour in May 2022 to meet the resurging desire among wealthy buyers to visit Japan following the country’s relaxation of entry restrictions in April this year.

Customers are occasionally unanimous in their support of purchasing goods from Tokyo retailers. Chung also noted that every consumer or household spent an average of HK$3 million to HK$10 million on purchases in Tokyo.

Real estate agents believe that the excursions highlighted the allure of the lower yen and how the Tokyo market looked to be immune from the recessionary concerns circling other capitals.

Analysts claimed that a portion of that was due to the meagre loan rates available to purchasers in Japan due to the central bank’s steadfast resistance against tightening repo rates.

Meanwhile, in Hong Kong

Except for a temporary decline in 2020 due to the coronavirus pandemic, Hong Kong property prices have relentlessly risen in residential areas. As a result, they were seen as one of the safest bets of the previous decade.

Despite criticism that homes are overpriced, the housing market has defied its detractors and driven prices higher in 3/5th of the interest-rate rise cycles since 1993. It is due to the desire to house a population of 7.4 million people with limited space for expansion and a general belief among many city residents that real estate is a safe investment.

However, a slower-than-expected economic recovery in the city from the fifth wave of COVID-19, combined with a sharp increase in borrowing costs in 2022 – four rate increases by the Fed thus far to control inflation – could pour cold water on the market, according to industry experts.

Real estate agents claim that several homeowners have sold their apartments at substantial losses or discounts.

According to Wan Chan, chief district associate director at Centaline Property Agency, “The pace of turnover for second-hand transactions has slowed down slightly due to the repeated outbreaks and the increases in interest rates in the United States, and some owners have also begun to face the reality and increase discounts.”

The Federal Reserve raised interest rates by 75 basis points in 2022 for the second consecutive month to rein in inflation, which reached 9.1% in June this year and is far above its goal rate of 2%. To assist in preserving the peg between the US dollar and the local currency, the de facto central bank of the city, the Hong Kong Monetary Authority (HKMA), has followed the Fed’s lead.

However, because local lenders have held the prime rate steady for the previous four years, many homebuyers have not experienced the same amount of rise in their mortgage rates. Following the Fed’s decision, major banks kept their prime rates the same, although market watchers anticipate a slight increase in those rates in the coming days.

The higher mortgage payments on their family debt will put some additional strain on customers, according to Standard Chartered CEO Bill Winters. He said, “Central bankers increase interest rates to stifle economic growth and so bring inflation under control. Like everywhere else in the world, we will experience that in Hong Kong.”

According to the bank’s chief financial officer, Andy Halford, Standard Chartered will wait and see interest rates. “We will amend that if we determine it is appropriate. There have been a few changes to the prime rate in the past. So breathe easy,” the CFO advised. “Nevertheless, we will continue to monitor it,” he concluded.

Financial Secretary Paul Chan mo-PO informed the Post in advance of the Fed’s decision that commercial banks in the city will be forced to hike their prime rates but probably not at the Fed’s scale and speed.

Due to buyers’ worries about rising interest rates and the economy’s prospects, Hong Kong’s real estate market has slowed recently. Since March 2022, mortgage payments based on the Hong Kong interbank offered rate have increased as US rates have gone up.

Ricacorp Properties published a report which states that the number of transactions that resulted in losses reached 695 in the first half of 2022, the highest figure since 2011. Around 94.6% of transactions during that time were profitable sales, the lowest percentage since 2010.

In addition, the average gain was the smallest since the first half of 2016, at 66%. For instance, a 566-square-foot apartment at The Mediterranean in Sai Kung recently sold for a loss of HK$2.54 million, or 24% of the original price, according to Century 21 Goodwin.

Centaline, St. Barths in Ma On Shan also had a 592-square-foot apartment that was sold at a loss of HK$1.25 million (US$157,983).

According to Rita Wong, head of the valuation and consultancy, CBRE Greater China, increased interest rates alone negatively impact home values since they impact affordability and investment returns. She said that several other elements, such as slower economic development, higher unemployment, and COVID-19-related travel limitations, are more likely to impact costs.

Hong Kong’s economy shrank by 4% in the first quarter of 2022, and Chan, the city’s financial head, has warned that the pandemic’s slow recovery may force the government to lower its annual growth prediction for the second time in three months in August.

According to CBRE data, real estate values have risen twice during rate-hiking cycles in the last 20 years. But perhaps things will be different now. “Those times were supported by good economic expansion.”

However, Wong believes the market fundamentals are far more complex this time. The economic climate was “pretty good” during previous higher rate cycles, according to Eric Tso, chief vice-president at mReferral Mortgage Brokerage Services. This time, he noted, “the economy is only now beginning to recover.”

The Centa-City Leading Index, a measure of occupied residences by the Centaline Property Agency, is one indicator of the pressure on the real estate market. From a peak in early August 2021, seven months before the US started raising interest rates; it had fallen by 6.2%.

The reduction occurred when the fifth wave of COVID-19 cases raged this spring, driving many residents and foreigners out of the city due to coronavirus quarantines. Due to the virus’s containment, travel between Hong Kong and mainland China was still restricted, which decreased the demand for investments.

Albert Wong, honorary chairman at AA Horses Mortgage Brokerage Services, said that the decline in housing values in Hong Kong, which began in 2021, is a result of the double blow of anti-government protests and the coronavirus pandemic on the city’s economy.

According to Wong, “the housing market will often feel the impact of the interest rate hike six months later.” It hints at the housing market beginning to feel the effects of interest rate rises that started in the 2022 second quarter.

In JP Morgan’s analysis, residential prices rose by 13% with a prime rate hike of 300 basis points beginning in November 2004 but fell by 4% during an increase of just 12.5 basis points starting in 2018.

Cusson Leung, head of Hong Kong research, conglomerates, and property at JP Morgan, noted that rising interest rates generally reduce demand for all economies. But won’t hiking interest rates result in less demand for housing? No, not always.

Wong of AA Horse, the Individual Visit Scheme, which allowed people of the Chinese mainland to visit Hong Kong or Macau without needing a visa or being a part of a group tour, contributed to the price increase in 2004. But, in his opinion, the city’s property boom among mainlanders who went on a buying spree mitigated the rate increase.

The International Monetary Fund calculated that the city’s house prices were up to 30% overpriced in the third quarter of 2021 and warned that a “disorderly correction” in the real estate market might be dangerous for the local economy.

In March 2022, the international financial organization predicted that property prices would rise by 5.8% this year and more than 7% annually by the end of 2026. The IMF warned that “a severe house price correction might produce an unfavourable feedback loop between house prices, debt service capacity, household spending, and growth, significantly harming banks’ balance sheets.” When faced with rising interest rates and declining income, low-income people may experience severe financial stress.

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