Hong Kong's Rich Get Richer Flipping Floors in Property Frenzy

(Bloomberg) -- In Hong Kong, a city of property superlatives, add this one: World capital of flipping office floors.

Logistics heir Johnny Cheung Shun-yee made roughly HK$900 million ($115 million) in about nine months by buying and selling two floors of the city’s most expensive office building, based on estimates in local media reports.

Hong Kong's Rich Get Richer Flipping Floors in Property Frenzy

Dubbed “Logistics Cheung” by the local tabloids because of his family’s Man Sun Logistics Ltd., the businessman sold the 49th and 50th floors of a 346-meter skyscraper called The Center in August.

He’s far from alone in chasing riches this way. Wealthy individuals and families are slicing and dicing office buildings that would be too expensive to buy outright, giving them access to a market unencumbered by government efforts to slow home-price gains. The value of so-called strata-title office deals in the Chinese enclave reached $3.8 billion in the first half, doubling from a year earlier, according to Real Capital Analytics.

Among the world’s biggest commercial hubs, only New York comes close to boasting similar volumes over the past half-decade.

Hong Kong's Rich Get Richer Flipping Floors in Property Frenzy

Strata-title deals allow for separate owners of sections of buildings, as opposed to an entire property being owned by a single entity. Back in 1952, developer Ng Tor Tai started floor-by-floor sales in Hong Kong by asking lawyers to devise a new ownership structure for two of his buildings in Tsim Sha Tsui, according to C.K. Lau, head of valuations advisory services at Jones Lang LaSalle Inc.

The deals allow deep-pocketed investors to make quick profits in an office market where prices have more than doubled over the past decade, while still remaining cheaper than luxury housing on a square-foot basis. Office space has the added lure of lower stamp duties than in residential transactions.

Cheung was part of a consortium of investors which bought 75 percent of The Center from billionaire Li Ka-shing’s empire last year for $5.2 billion, the world’s biggest office property deal. The final group also included the “Minibus King” Ma Ah Muk, the “King of Cassettes” Chan Ping Che, and the “Queen of Shell Companies” Pollyanna Chu Yuet Wah, to use the nicknames local press have bestowed on them.

Selling The Center

Three consortium members, including Cheung, have since divested at least three floors and part of a fourth floor in strata-title deals, according to local media reports. The fourth floor was carved into 12 units, according to property broker Midland IC&I Ltd.

Cheung bought the Center floors for less than half the square-foot price of a typical luxury home, he said in an interview where he shrugged off questions about risks. “It’s a good investment. The Center is a grade-A office building in Central, after all.”

Office costs in Central, the main business district on Hong Kong Island, are the highest in the world.

Cheung sold the two floors for HK$50,000 and HK$52,000 per square foot, respectively, according to local media reports, which cited unidentified people. That adds up to HK$2.6 billion, based on the size of the floors. At a reported average purchase price of HK$33,000 per square foot, Cheung would have paid about HK$1.7 billion. Cheung, who still holds a third floor, declined to discuss details of the sales.

Hong Kong's Rich Get Richer Flipping Floors in Property Frenzy

When it comes to the pool of families and individuals with enough money to do strata-title deals, Hong Kong has few peers. The city surpassed New York last year for the number of people with wealth of at least $30 million, according to research firm Wealth-X. The city’s individuals in that category numbered about 10,000. Hong Kong had 170,400 millionaires in 2017, according to Capgemini SE, or about one in 50 residents.

Wealthy people investing in Hong Kong’s strata office market usually have experience in real estate and often have backgrounds in metals trading or construction materials, according to Daniel Mok, director of capital markets at CBRE Group Inc. Individuals account for about half of the deals, he estimated, adding that “we have also seen some local families partner up to establish investment funds.”

In 2017, there were 205 strata-title office transactions of more than HK$30 million each, according to Colliers International Group Inc.

While the stamp duty on commercial purchases is capped at 8.5 percent, the rate can reach as high as 30 percent on residential deals. Selling residential real estate within six months of buying can incur an extra 20 percent tax.

Hong Kong's Rich Get Richer Flipping Floors in Property Frenzy

With Chinese demand for commercial space showing no signs of weakening and limited new supply, speculators deterred by government efforts to curb prices in the residential market continue to flock to strata-title deals.

In April, the 34th floor of 9 Queen’s Road Central set a record square-foot price for a strata-title sale, surpassing the previous mark by 11 percent, according to Midland IC&I. Offices in the core business area, including Central and Admiralty, are particularly sought after.

“Investors can see that there won’t be land plots available for development in the near future, while rents in Central have been rising,” said Adrian Tang, head of Kowloon markets and strata-title office sales at Jones Lang LaSalle.

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