Wenzhou investors mass exit?

Despite a burgeoning debt crisis, the Hong Kong property market remains attractive to Wenzhou people because of stable returns and favorable policies. Li Tao reports.

Wenzhou merchants are tipped to have invested a lot in the Hong Kong property market, contributing to the city's real estate boom over the past two years. However, the burgeoning lending crisis in the wealthy southeastern Chinese city has caused worries here over whether Wenzhou investors will flee, dumping their properties in Hong Kong in a fire sale due to a shortage of funds and therefore bringing an adverse impact on Hong Kong's home market.

Wenzhou's robust private sector has allowed it to make a name as one of China's wealthiest cities. Wenzhou merchants are also known for their speculative investment activities in various sectors in recent years across China and even overseas. After the central government tightened policies for home purchases on the mainland since mid-2010, property investors - particularly those from Wenzhou - flocked to Hong Kong and overseas to buy homes as they were no longer able to raise mortgage loans, or were even forbidden to purchase multiple homes in major mainland cities.

Mainland buyers accounted for 51 percent of Hong Kong's new home sales by value in the third quarter, up from 37 percent in the previous three months, Centaline Property Agency Ltd said on October 25, adding that mainland buyers constitute 49.7 percent of all transactions in Hong Kong for the launch of new residential projects priced HK$12 million and above during the past three months. And for units priced below that amount, they are still snapping up a sizable 36.2 percent of them.

Zhou Dewen, president of the Wenzhou Small and Medium Enterprises Development Association, estimates that more than 20 percent of Wenzhou's total overseas investment flowed into Hong Kong, particularly in the city's real estate market.

"Government measures on homes on the mainland have driven money from Wenzhou to seek profits overseas. Hong Kong is particularly favorable to Wenzhou people as they find it convenient to live there without much language obstacles," Zhou told China Daily.

However, the cash-rich city has been hit by a severe debt crisis recently. Due to the central government's tightened credit policies, underground borrowing has become rampant across the country. Total private lending on the mainland is in excess of 2 trillion yuan ($315 billion), according to Ma Jun, Deutsche Bank's chief economist for Greater China.

In Wenzhou alone, the size of private lending may have reached 110 billion yuan, where almost 90 percent of local families are all involved in it one way or another, a report released by the Wenzhou branch of the People's Bank of China said at the end of July.

Due to exorbitantly high interest rates and worsening export scenarios, many small enterprises are on the brink of bankruptcy, which has led to worsening debt default problems. At least 80 business people were reported to have disappeared, committed suicide or declared bankruptcy - invalidating debts owed to individual creditors pooled from the informal lending market, China Daily reported recently.

The debt crisis has led to speculation that Wenzhou investors may dump their properties in Hong Kong to get the much-needed cash. Citing agency data, Hong Kong's local media reported recently that one Wenzhou buyer sold off 11 properties he owned in Hong Kong during the week-long National Day holiday.

The enthusiasm of mainland investors, including those from Wenzhou, in the Hong Kong property market seems to have cooled down as well. During the seven-day "golden" holidays in early October, Hong Kong saw a big drop in property-hunting tourists from the mainland accompanied by a dramatic increase in advertisements on the windows of real estate agencies by those from the mainland wanting to sell up.

"In some new property launches in West Kowloon, the proportion of mainland buyers has decreased to below 30 percent recently from 70 percent a few months ago," said Du Jinsong, head of China Property Research at Credit Suisse (Hong Kong) Limited. It's still too early to say mainland investors are fleeing Hong Kong, Du said, but some of them are preparing to weather the bitter storm.

Some business insiders have ruled out the mass exit of mainland investors, especially Wenzhou merchants, from the Hong Kong property market. Wong Leung-sing, associate director of research at Centaline Property Agency Limited, said the media have been exaggerating reports of property investors in Hong Kong selling up. "If there were so many mainland investors that were selling their properties, the prices in the city would have seen notable declines."

"Mainland property investors in Hong Kong, especially those from Wenzhou, are very wealthy and their reach has extended all over the world," Wong said. "They have become less active in purchasing new homes in Hong Kong because they expect that prices have peaked, rather than their being short of money."

Zhou, president of the Wenzhou's SME development association, holds a similar view. "Even if some Wenzhou businessmen need to sell homes to withdraw funds, they would hardly start from Hong Kong. They would sell their mainland properties, which have been facing price declines and more severe curbs," said Zhou.

The central government's crackdown on the underground money market has caused mainland investors to lose an important investment vehicle. As a result, total bank deposits in Wenzhou have soared to 760 billion yuan in the city this year, according to Zhou. This large sum of cash still floating about could flood back to Hong Kong's property market, he said.

Some deep-pocketed Wenzhou investors also seem to agree, continuing to favor the city as they hold that Hong Kong is one of the global housing markets most worth investing in due to its low mortgage rates, high lease returns as well as friendly government policies.

Gao Lei, a 40-year-old veteran property investor from Wenzhou who owns two properties in Hong Kong, is among these optimists.

In early 2010, he spent HK$18 million on a 1,000-square-foot apartment for a luxury complex built by Sun Hung Kai Properties - the Cullinan. Two months later, he came to Hong Kong with some friends again and bought another similar-sized apartment in the same developer's Aria-Kowloon Peak, costing another HK$10 million. Both real estate projects were new launches in the market.

The practice of buying to lease is commonly seen among mainland property investors in Hong Kong. Without even spending a single night in the apartments, Gao found a broker and leased them right away.

From the first-half of 2010, Hong Kong has resorted to multiple measures to curb home purchases by non-resident buyers, including higher down payment requirements and heavy stamp duty if one resells the property within a short period of time. In October 2010, it also suspended offering residency rights to mainland investors who buy property in the city in a bid to cool an overheating property market as Hong Kong's home prices surpassed the previous peak set in 1997.

But these restrictive measures have failed to dampen the investment plan of some mainland investors like Gao, who now holds a Canadian passport - quite a number of his fellows in Wenzhou have obtained Hong Kong or foreign residency, which makes their travels around the globe much easier.

"At least Hong Kong is one of the only major cities in China that has not imposed severe regulatory measures to prevent investors from entering the property market," Wong said.

According to Gao, after home prices reached a certain level and home transactions were severely restrained by a number of government policies, a number of so-called "speculators" have shifted to a longer-term strategy of generating stable returns from rental incomes.

"To us Wenzhou people, the property market is the most reliable investment area," Gao told China Daily. "Unless Hong Kong banks stop loaning money to us, I will continue to favor Hong Kong and come to purchase homes," Gao said.

litao@chinadailyhk.com

(HK Edition 11/11/2011 page2)