Jammy investors: is Hong Kong property feeling Japan's doughnut effect?
When I heard from a friend of mine who is relocating his hedge fund that office rents in Central Hong Kong were down 25-30 per cent this year, and from another that mid-level rents were tumbling, I started to wonder if we are seeing what is referred to as a "doughnut effect" impacting Hong Kong. A doughnut effect refers to a hollowing out of the city centre as people and businesses move to the outskirts. This can have a long-term effect on property prices.
I have seen this before, but on a much larger scale.
As a 1980s "yuppie", I was fortunate early in my career to be sent to Tokyo. Over three assignments there, and nearly 40 years in East Asia, I have witnessed a full doughnut effect in Tokyo. First, a mass migration of the population from Tokyo to the surrounding suburbs, with the resulting hollowing-out of the central city areas. Then, after prices had fallen, people moved back into the city ready to do it all again - a cycle that has taken about 30 years.
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In Tokyo, this movement of people was driven by a combination of social and economic reasons, and involved a large percentage of the city's working population.
Going down: people in face masks descend the stairs at the Mid-Levels escalator in Central, Hong Kong. Photo: Nora Tam
THE FLIGHT OF THE DOUGHNUTS
To get a sense of the impact from the doughnut effect as people move out of the city centre leaving a hole, I'll describe what I've observed in Japan and see to what extent it applies to what's happening in Hong Kong today.
The 1970s and 1980s saw a large-scale migration of people into Japan's cities as they sought out the best jobs and the best pay. I arrived in 1986 to a raging bull market where the flow of money appeared endless and everyone was doing well. By the early 1990s, there had been enough love and money flowing around in Roppongi to make lots of new young families. Everyone had plenty of money and people were feeling that their 45 square metre downtown apartments were too cramped to raise kids in.
This pushed up the price of property in the suburbs into the 1990s when the banking crisis and the bursting of the bubble economy subsequently led to 20 years of deflation.
The cityscape of Tokyo, as seen from an observation deck on the top floor of Roppongi Hills Mori Tower. Photo: AP
DOUGHNUT HOLE
For anyone stuck in a city condominium, it turned out they'd have to wait nearly 30 years before they could sell their property at anything resembling what they bought it for. Tokyo became very dull as the nightlife in the central city withered and the madness of Roppongi was replaced with cheap kebab takeaways and gaudy discount chain Don Don Donki.
Prices of property in the suburbs, meanwhile, remained fairly buoyant. Most people owned their own homes and early retirement payouts were common as the economy took a major dive, so there was still some decent money around in the 'burbs even though business was bad in town.
As the suburban kids grew up and graduated from university, they once again sought out the best jobs, which were in the city. They moved in towards the centre, leaving their parents in the sticks to rattle around in their big houses.
The Japanese condominium market, particularly in central Tokyo, has been on a tear over the last seven years, driven by three important factors:
"Young professionals seeking convenience. Commuting is a pain, and as property prices had fallen to relatively cheap levels in the city they could move a lot closer to their work.
"Parents moving nearer to the kids. Rattling around in an old house while the kids are living large in the city and planning for grandkids is no fun, so the original wave of suburbanites from the 1990s started to move back. Additionally, being near shops, clinics, hospitals and railway stations as one gets older is a good idea.
"The low cost of money. With the lowest mortgage rates in living memory, getting a mortgage has been cheap. When one can borrow at 0.5 per cent on a floating rate with no prospect of rates going up, it's a no-brainer to buy.
And now, the reverse is happening:
"The 1980s and 1990s kids have grown up and are having children of their own. They will naturally want a house with space and a backyard, just as their parents did. Schools in the suburbs are easy to find and not crowded.
"Interest rates are even less likely to rise after Covid-19 and the Bank of Japan has reiterated its policy of holding them down. One can still easily borrow at less than 1 per cent from the many banks craving for business, so it is a good time to buy cheap out-of-town property and roll into another 30-year mortgage.
"Suburban property is at bargain prices compared to city properties that have risen substantially. And now there is the added bonus that some employers will pay more to those who choose to work from home as business continuity risks in the wake of Covid-19 can be managed better. It seems even the Japanese have gotten to grips with working remotely.
One of Japan's major tech companies, Fujitsu, recently announced a permanent work from home plan with its "Work Life Shift" programme. Its 80,000 employees across the country were given the option to cash in their commuter passes - and return the money - in exchange for a little extra in their salary, work flexible hours from home, and when coming to the office Fujitsu would reimburse the fare. Its headquarters in Shinagawa is likely to become a ghost town, along with other large parts of Tokyo.
Although the drivers for a doughnut effect in Hong Kong are nowhere near on the scale of Tokyo, both in the numbers of people and the timeline, the same drivers are pushing people to work from home, and the impact of people moving out from the city may be the same.
Don Don Donki in Central. Photo: Neil Newman
HONG KONG: GETTING STICKY WITH IT?
Central has certainly passed its sell-by date and become stale. The once busting nightlife of Lan Kwai Fong, Soho and Wan Chai has all but disappeared in favour of areas further out, such as Sai Ying Pun, Kennedy Town or Tai Koo. Shopping in Central is imploding as major retailers like The Gap and Top Shop are calling it quits. One can only wonder how many others will go in the coming months. The only incoming store seems to be the aforementioned Japanese discount tat shop and eyesore Don Don Donki on Queen's Road Central.
Apartment rents in the Mid-Levels are reportedly down around 20-30 per cent, about the same as office rents in Central. But out in the sticks where I live, I am witnessing first-hand that rural Lantau rents are rapidly on the rise again, so purchase prices are likely to resume their climb.
Overseas too, it is clear major cities are suffering from a doughnut effect, driven by more people working from home. This is particularly a topic of conversation in London, Manchester and Birmingham where only 15-20 per cent of the office workers of some major firms are returning, and employers have no immediate plans to lure more of them back. Property demand can be tracked easily on property portal Zoopla, which reveals that property in the "commuter belts" of large cities and homes in coastal towns are in high demand compared to the central city residential areas.
I think we can expect to see this play out in many places across the globe. Demand for downtown office space in major cities has likely peaked for the time being, and inner-city residential property prices will tumble as the suburbs boom.
Investors and homeowners alike would be wise to keep an eye on this trend. If Hong Kong and other cities are about to follow the same playbook as Tokyo did all those years ago, there will be opportunities to make some money, and a risk of losing a lot. And I would suggest that if you want to be a jammy property investor, here or overseas, get ahead of the next wave of doughnuts while you can.
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
