Could Dubai prices ever reach Hong Kong levels?

25/03/2007

The gap between house prices in Hong Kong and Dubai has narrowed. But the Chinese city still boasts some of the most expensive real estate in the world, costing up to three times more than comparable Dubai property. And yet income and wealth in Hong Kong is not so different from Dubai these days.

Last week AME Info sat down with David Faulkner, regional director of Colliers International in Hong Kong to ask him about the parallels between the two cities. A veteran of numerous property market booms and busts around the world, he has spent a lot of time in Dubai recently advising clients.

'Hong Kong has a monopoly land owner, the government, and all private ownership is leasehold,' he said. 'Real estate has become a big source of government revenue with land often costing 60-70 per cent of development cost.

'The system also works very well for the home buyers. People here have high incomes with low rates of income tax and invest in property as a store of value.

'This has allowed residential rental yields to fall to two to three per cent, as investors are really interested in the future capital increase and not the rental income.'

Rental comparison

The last point explains why home rental levels in Hong Kong are not so far out of line with Dubai, and yet house prices are very much higher.

Mr. Faulkner first remark also notes how important the real estate sector is to the Hong Kong government as a source of income, and that could also be said of Dubai these days.

In the same interview Mr Faulkner explained how the newly independent government of Hong Kong had made a mistake in 1997 of wanting to cool a booming housing market by boosting supply, which unfortunately coincided with the Asian Financial Crisis and then the dot-com crash.

'By 2002 the government realized that this supply was not a good thing and began cutting back, and in 2003 the government stepped out of housing for sale and allowed the private sector to cut supply right back.'

This was compounded by the SARS health crisis but the market bottomed out in 2003, with prices an incredible 70 per cent lower than the peak. There were actually very few real estate sales at this level and the banks rallied around to help mortgage payers and developers over the crisis.

Recovery dawns

Over the next 18 months prices doubled. And prices at the luxury end of the market are back at 1997 levels, although cheaper property is still selling for less. Thus a combination of government market control and market forces has restored the Hong Kong real estate market to its former status as among the most expensive in the world.

Could the Dubai Government learn from this experience? It too has tremendous control over the local market, and could pull supply levels back in a downturn if required. It might choose to act more quickly than in Hong Kong where the government hesitated for too long.

However, Hong Kong business is already complaining about the surge in accommodation costs and threatening relocation. So creating a paradise for real estate investment has to be balanced against the needs for competitive real estate rental levels.

On that reckoning it may not be a bad thing for Dubai if housing stays nearer to current valuation levels.

But the Hong Kong experience does suggest that a trading hub can sustain house price levels higher than the present status quo in the newly created Dubai market. And in particular rental yields could fall as the market matures, supporting higher property valuations but most probably not until after a market correction.