Hong Kong Property: Actually, It’s More Expensive Now Than 199721 March, 2011, 2:45. Posted by Zarathustra
Tags: Hong Kong, Leases, Policy, Property, Real Estate
As the widely followed Centa-City Leading Index approaches the level of 100, it means that the overall home prices in Hong Kong is getting closer to its previous peak in 1997 right before the Asian Financial Crisis hit. Perhaps it is something that some people would like to celebrate, e.g. those who bought their homes at the peak in 1997.
While there are still a few percentage points ahead before hitting the previous peak, the overall home prices in Hong Kong are really more expensive now than 1997. In addition to the fact that Hong Kong real estate are 13 years older overall than they were in 1997, there is one big problem that very few people care to think about that.
When a real estate developer “buys” a piece of land from the government, it does not really “buy” the land. It only leases the land from the government for a given period of time. And if the developer builds 100 flats on that site and sells to 100 buyers, each buyer will be entitled to have one-hundredth of the right to use the land for given period of time. Let’s face it, most lands in Hong Kong are leasehold, not freehold. The only freehold land in Hong Kong is in where the St. John’s Cathedral is located.
All leases will end some day (except freehold leases). At what date? Well, because the Imperial Chinese government gave away Hong Kong Island and Kowloon Peninsula initially, the British Hong Kong government could grant land leases at whatever terms they wish. Thus 999-year leases (mostly in Hong Kong Island), 99-year (renewable for another 99-year) and 75-year (renewable for another 75 years) existed. When the British got the New Territories, however, they leased it from the Imperial Chinese government for 99 years, which would expire in 1997. As a result, all new leases being granted in the New Territories could only last till 1997. As a result of the Sino-British Joint Declaration in 1984, leases which expired in 1997 were extended to 2047 without additional payment of land premium (but would be liable for government rent, which is very small), and from 1985, the British Hong Kong government could only grant new leases which expire in 2047 the very latest (which would also be liable for government rent). Thus except some old leases in Hong Kong Island and Kowloon, most other leases in Hong Kong will expire in 2047 (David Webb has a nice summary table on land leases in Hong Kong since the British rule).
No matter when the leases expire, two things are very certain. Firstly, most real estates in Hong Kong are now 13 years older than they were in 1997. Secondly, there are 13 years less in the remaining terms of the leases for all real estates, no matter how long the terms they are.
When a non-renewable lease expires, the government can take your property without giving you a penny, so theoretically and pessimistically speaking, most properties will be worthless in 2047. Although no one in his/her right mind seems to believe that such thing may happen, it is really far from clear what will happen after 2047. Before anyone has any clear answer to that question, those properties with leases running out should be worth less and less as time goes by (though this is not happening right now as people are so excited about the property market).
To give you an example, if a given property on a lease which expire in 2047 was sold at HK$10 million in 1997 , the buyer would have the right to use the property for 50 years. If that person then sold the same property to another buyer at HK$10 million today, the new buyer would be able to use the property for 36 years only, theoretically. Although it looks as if the prices were the same, what the second buyer was getting would be worth less.
Of course, as the market is still red hot now, these pessimistic views will be ignored. And perhaps it will be ignored until 2037, 10 years before 2047.