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The entire commercial and residential property at No. 3 Yu Chau Street, Prince Edward, was sold at a "slash-price" of HK$22 million, a staggering drop of HK$731,000 compared to the purchase price five years ago.Deng ChengboThe tip of the iceberg of the family's investment portfolio has become a microscope for deconstructing the dramatic changes in Hong Kong's property market. What deep-seated market problems are reflected by this transaction involving the evaporation of 61 million real cash?
Price curve from myth to hell
In August 2019, this 4-storey tenement building with a total usable area of 4,096 square feet was sold at a sky-high price of 83 million yuan, despite the dual shadows of social movements and the Sino-US trade war, with the cost per square foot exceeding the 20,000 yuan mark. At that time, the industry generally interpreted it as evidence of "strong demand for safe-haven funds", but no one expected it to be the last spark in the property market.
Compared with the latest transaction price, the price per square foot is only 5,371 yuan, equivalent to 26.8% during the peak period. If calculated by floor, the value of each floor was halved from 20.75 million to 5.5 million, and the rate of decline exceeded that during the 1997 financial crisis. It is worth noting that the current monthly rent of the property is about 50,000 yuan. Based on the transaction price, the rental return rate is only 2.7%, which is still lower than the mortgage rate, reflecting that the receiver is betting on long-term asset appreciation rather than cash flow.
Financial health checkup report of Deng Chengbo's family
In the past three years, the Deng family has sold assets and cashed in more than 8 billion yuan. This fire sale is just the tip of the iceberg of asset restructuring. A closer look at its holding costs: if the purchase price of HK$83 million is calculated based on a 70% mortgage and an interest rate of 2.5%, the interest expense over five years would have reached HK$7.26 million. Adding in rates, maintenance and vacancy costs, the actual loss may be close to HK$70 million.
What is more interesting is the choice of trading timing. The decision to sell urgently before the U.S. Federal Reserve is considering cutting interest rates may reflect the liquidity pressure faced by the group. According to industry insiders, the property was listed for sale at 38 million last year, and the price was slashed to 42% within half a year, indicating that the owner is extremely pessimistic about the market outlook.
Field investigation revealed that the area around Ruzhou Street is undergoing structural transformation. The street used to be dominated by hardware and decoration material shops, but in recent years it has been gradually replaced by coffee shops and design studios due to the expansion of the Sham Shui Po Cultural and Creative District. However, the transition period has resulted in a shop vacancy rate of 18%, which has doubled compared to five years ago.
What is even more fatal is the change in people's consumption patterns. More than 30% of pharmacies and exchange shops within 500 meters of the property have closed down after the epidemic. The rent of residential units upstairs has dropped from an average of $45 per square foot in 2019 to $32 currently, a drop of nearly 30%, creating a double-killing situation for commercial and residential properties.
The invisible killer in the policy market
After the government’s "Employment Promotion Transport Subsidy Scheme" was implemented in 2020, it unexpectedly changed the living choices of office workers. The effect of expanding the subsidy scope to Hong Kong Island East has reduced the commuting population around Prince Edward Station by 12% in five years. At the same time, the URA’s “demand-driven” redevelopment policy favoured the Yau Mong area, leaving non-priority redevelopment areas such as Yu Chau Street in a development vacuum.
It is worth noting that the drainage control regulations that came into effect in 2023 have caused a surge in the renovation costs of such pre-war tenement buildings. A surveyor estimated that if the property is to meet modern standards, an additional investment of more than 5 million yuan in renovation costs will be required, which will directly reduce the investment value.
Undercurrent of international capital flows
Compared with the overseas property market during the same period, shops on Singapore's Orchard Road only retreated by 15%, while shops in Tokyo's Ginza bucked the trend and rose by 9%. This reflects the fact that the pressure on Hong Kong's retail real estate is of a regional nature. After the tax-free amount for cross-border e-commerce was increased to 800 yuan, local retail sales of cosmetics and electronic products fell by 23% year-on-year, directly impacting the demand for street shops.
Changes in the proportion of foreign funds holdings are more worthy of attention. The proportion of commercial and residential properties held by foreign capital in Prince Edward District has plummeted from 31% in 2018 to 7% at present, indicating that international capital is systematically withdrawing from the secondary core area.
Mathematical Model of Value Revaluation
The valuation logic can be deduced based on the current transaction price: if estimated based on a capitalization rate of 4%, the property needs to generate an annual net income of 880,000, that is, the monthly rent needs to reach 73,000, which leaves a gap of 46% with the current rent of 50,000. This suggests that buyers may expect:
- Government relaxes restrictions on redevelopment of old buildings
- Rents jump after community transformation
- The weakening of the US dollar leads to a revaluation of asset prices
The transaction price is lower than the land value, equivalent to purchasing it at a floor price of HK$4,200 per square foot, which is HK$581,000 lower than the latest marked price of residential land in the same district. It is a speculative act of "land value hunting".
Future Apocalypse
This expensive lesson of 61 million sounded three alarm bells for the market:
- Liquidity risks of assets in non-core areas intensify
- The cost of holding old buildings has entered a period of rapid increase
- The community economic transformation period may take up to ten years
When the investment rule of "Location, Location, Location" encounters the reconstruction of community functions, the traditional valuation model faces the risk of failure. Perhaps the real revelation is that in Hong Kong in the post-epidemic era, there is no permanent core area, only constantly redefined value coordinates. Those who still value assets with the perspective of 2019 will eventually become living textbooks for the market.
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