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Economy

Popularity of 'solitary confinement' condos worries Hong Kong property watchers

The Mont Vert condominium is under construction in northern Hong Kong. Developer Cheung Kong Holdings says interest in the smallest units has been especially high.

HONG KONG -- Cramped condominiums are increasingly hot properties in Hong Kong, prompting pundits to sound the alarm about an overheating real estate market. 

     Large apartments, not to mention single-family homes, are beyond the reach of many in the city, where 7.2 million people reside in an area half the size of Tokyo. But condo buyers are showing a willingness to compromise on space, and major developers are moving to cash in.

     Cheung Kong Holdings has drawn attention with its Mont Vert condominium. The smallest studio starts at 1.77 million Hong Kong dollars ($232,861), exceptionally low for the local market. The catch: It measures 16 sq. meters. When the company announced the project, a Hong Kong newspaper compared the studio to a typical solitary-confinement prison cell, which measures 7.4 sq. meters.

     Mont Vert sits in a suburb not far from mainland China, a 30- to 40-minute train ride from the heart of Hong Kong. Besides the size factor, the project has been somewhat controversial because of a Cheung Kong policy that prospective buyers cannot view the units before signing. The company says it instituted the policy for clients' safety, to avoid having them enter a construction site. Some allege the real reason is that there is a grave site nearby -- a potential disincentive for superstitious customers.

     Nevertheless, Cheung Kong officials said there has been a steady stream of inquiries and the company remains bullish about the project.

     Meanwhile, Chinese Estates Holdings in early September launched sales of a condominium on Hong Kong Island and secured buyers for 90% of the units on day one. The flats measure 19 sq. meters to 25 sq. meters.

     Henderson Land Development put 15-sq.-meter condos on sale in late October.

     And Sun Hung Kai Properties planned to sell large condos in northern Hong Kong but decided to break them down into 4,000 smaller ones.

Easy investment

The government's index for private-sector housing prices testifies to the popularity of small apartments.

     In August, the most recent month with available data, the index hit 260, with 1999 used as a baseline of 100. Look at only condos of less than 40 sq. meters and the index comes to 283; for the 40- to 160-sq.-meter range it registers at 240 to 250.

     Flats of less than 40 sq. meters have logged the steepest price increases since the beginning of the year. New highs were set in the four months through August.

     Much of the activity stems from speculation. Investors, fed up with prolonged low interest rates, are treating small condos as readily accessible investment tools. Chinese Estates said 80% to 90% of its small flats have been purchased for that purpose.

     A senior official at Midland Realty, a leading real estate agency, said investors account for more than 50% of buyers of small flats over the past several months. Up until the middle of last year, the ratio was around 10%.

Watch the rates

Some experts worry all of this could spell trouble, since monetary policy in Hong Kong tends to mirror that in the U.S.

     The U.S. Federal Reserve ended quantitative easing last month and is widely expected to carry out an interest rate increase in the middle of next year. Tao Dong, a Hong Kong-based economist at Credit Suisse, said mortgage rates in the city are highly likely to rise by 1 percentage point to 1.5 percentage points by the end of 2015, and another 0.5 of a point in 2016.

     Each 1-point hike raises homebuyers' average monthly loan payments by HK$1,600. As a result, individuals with limited financial leeway would have to retreat from investment in small condos, Tao said.

     While the property market may be approaching a turning point, developers are aiming to make the most of the small-condo craze while it lasts. Cheung Kong was scheduled to release an additional 33 Mont Vert units on Friday, reportedly at 19%-higher prices than the average for the previous sale.

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