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The Year Of The Landlord In Hong Kong


Finance

THE YEAR OF THE LANDLORD IN HONG KONG

A roomy apartment. Tennis courts and a playground for the kids. Nice views. For years, this has been standard quarters for stressed-out expatriate managers in congested Hong Kong. But perhaps not for much longer. A wave of astronomical rent hikes is forcing expats to scramble for cheaper digs because their corporations won't match the increases. "This is outrageous," fumes a U.S. banking executive whose family gave up a four-room apartment in Parkview, a popular high-rise on Hong Kong Island, when the monthly rent soared from $7,100 to $10,980 in two years. "If this is the path rents are headed, what will happen to Hong Kong's business climate?"

The answer isn't comforting. With Western companies feverishly expanding in Hong Kong to get a piece of China's dynamic economy, the real estate market in the British colony is red-hot. The boom has been a windfall for developers. But it's turning expatriate managers into "rent refugees" as they dash to find apartments in older buildings.

Unfortunately for renters, the market still has a lot of energy left. With rents for prime residential housing surging 84% since 1990, monthly rent for a modern 1,500-square-foot apartment now averages $6,590. Residential rates are likely to go up an additional 30% this year. The commercial sector is only slightly better, with office rents up 55%. Rents are expected to surge 45% in 1994. Prices may even surpass the Tokyo commercial real estate market this year.

The big reason for the runup is Hong Kong's tiny supply of land. Under a pact with Beijing, the government makes only 20 acres a year available for development. Hong Kong is reclaiming hundreds of acres more from its harbor. But none of the land from the projects will be ready before 1998. Meanwhile, both the office and residential sectors are already near full occupancy. Massive Chinese investment is also buoying the market. "Hong Kong has many years to go before becoming a bubble," says Franklin Lam, an analyst at Salomon Brothers Hong Kong Ltd. "There's just too much demand and too little land."

Some foreign companies are not deterred by the prices. With an eye on China's huge market, such multinationals as Salomon Brothers, Quaker Oats, General Electric, and Philip Morris are dispatching managers in waves to Hong Kong. "For a lot of big U.S. companies, it doesn't matter how much they pay the landlord as long as they can get close to the Chinese border," says Lyall Alexander-Webber, Hong Kong director of property agent Vigers Hong Kong Ltd.

But the speculative frenzy is causing headaches for other companies, even those with deep pockets. Take Motorola Inc., which is increasing its expat staff of 75 by 25% this year to support its thriving business in semiconductors and telecom. It occupies several floors of a Hong Kong Island building whose floors are being carved up and sold to speculators who would rather flip the property than sign a long-term lease. "This is becoming a game of hot potato," says William O'Neill, Motorola's Asia human resources director. "We have to negotiate with eight different landlords on one floor." So Motorola is taking seven floors as an anchor tenant in a new tower.

SKIMPY ALLOWANCES. For companies that want to stay, one strategy is to pay up and wait for prices to peak, which some brokers say will happen in 1996 when several skyscrapers are completed. Pol Cox, director of Jones Lang Wootton Ltd., predicts multinationals will pay through the nose now for short-term leases in expectation of a price drop when a lot of capacity comes on line. "Companies are aware this won't last forever," he says. In fact, adjusted for inflation, office rents are about the same as they were before the 1989 Tiananmen Square massacre.

But for individuals, the situation is likely only to get worse as employers try to hold down costs by skimping on housing allowances. Some analysts think as rent hikes exceed the pain threshold of expats, landlords will be forced to curb their greed. "It will soon be totally unaffordable, and the bubble will burst," predicts Hong Kong real estate agent Tricia Carton, who had to abandon her own apartment when, within three years, the rent tripled to $8,000 a month. But with many multinationals only starting to gear up their assault on China, that may be wishful thinking.Pete Engardio in Hong Kong


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