So in case you desire something more generous than a glorified walk-in closet, say, a 500-square-foot studio, perhaps, be prepared to surrender something along the lines of $2.1 million.

It gets better.

Exclusive properties around town, assuming you need something more advanced than an Afghani cave, have been nudging the $5,900-per-square-foot mark. That figure graciously elevates the asking price for our dream flat to a respectable $3 million.

Amazing.

Despite the fact that sales of new homes here in the States were down 17.3% from their all-time high in 2005 (sales of existing homes fell by 8.4%), London residential property keeps heating up. Broad-based values have experienced a 22.4% gain this year.

Home prices in the more exclusive neighborhoods have shot up more than 60%.

London isn’t alone… Similar properties in New York can garner roughly $5,300 per square foot. But what caught my attention was that comparable properties in Hong Kong were selling at a 25% discount to the country’s respective financial peers. Exclusive properties there sell at around $3,950 per square foot.

Hong Kong is only six times the size of Washington, D.C., with an annual GDP on par with both Argentina and Portugal.

More importantly, Asian financial centers like Hong Kong lack the expansive terra firma we in the West find so readily abundant.

Land is scarce. Land is and always will be the most valuable asset in places like Shanghai, Tokyo, Taipei, Hong Kong and Singapore. These Asian cities lack the land for urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte and Atlanta.

So I’m a little baffled that high-end Hong Kong real estate trades at such a noticeable discount to similar properties in New York and London. Hong Kong is the land of the rich. Twenty-one billionaires now call this city home.

Money will flow to where it’s treated best. And I think you’ll be hard-pressed to find another place in the world that treats money better than Hong Kong. Since 1970, Hong Kong has held top honors as the world’s freest economy.

Hong Kong stands as the world’s 11th largest trading entity and 13th largest banking center. Hong Kong produces a GDP per capita that ranks No. 1 among all economies on the Asian continent.

The highest tax bracket comes in at 17%. Individuals are assessed on only annual employment income. Dividends and capital gains are not taxed. Like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions. When you consider that Hong Kong provides arguably the world’s greatest municipal services in a relatively crime-free environment, good luck finding a more favorable tax policy anywhere in the world.

And like the low personal tax rates, Hong Kong’s estate tax holds a maximum rate of 15% on assets exceeding $1.35 million. So when Li Ka-shing, the world’s 10th richest man, looks to pass on his $18.8 billion-plus, he’ll do so under very favorable circumstances.

And here’s the kicker.

Hong Kong recently repealed its inheritance tax on property. Consequently, many Hong Kong property owners (U.S. citizens who own Hong Kong property are still taxed under inheritance laws) are now able to pass down real estate assets without any tax liability whatsoever.

Hong Kong will become a tax haven for the new class of the super-rich. Its skyline competes with Manhattan’s, its weather compares to Miami’s and public safety and infrastructure outclass anything you’ll see here in the United States. Disney has just moved in across the harbor on Lantau Island, and Macau, the Las Vegas of Asia, is just a 45-minute boat ride away. What’s not to love?

Prime locations in Central, Admiralty and Causeway Bay, the heart of Hong Kong, will continue to command premium prices for years to come. Hong Kong property stocks should prosper.

And right now, property development companies like Cheung Kong (CHEUY:Pink Sheets) and Sun Hung Kai (SUHJY:Pink Sheets) are both trading at very attractive prices:

Investors with direct access to the Hang Seng Index may also want to check out the Guoco Group (HK:0053).

Guoco is an investment holding management company based in Hong Kong. Its subsidiary companies and investment activities are principally located in Hong Kong, China, Singapore, Malaysia and the United Kingdom.

Guoco has four core businesses, namely, proprietary asset management, property development and investment, hospitality and leisure business and financial services.

It currently trades at 5 times earnings and has a 5% yield. Better yet, it has three times the cash on the balance sheet than total liabilities. Operating margins are consistent and strong.

That’s something to consider. Until next time.

Sincerely,
Christopher Hancock
January 26, 2007

Foreign Real Estate Markets was originally featured in the Penny Sleuth.