FEATURE: Focus on investment in luxury housing moves south

ROAD TO WEALTH::Efforts by the central bank to dampen a potential property bubble have had limited effect, but supply constraints encourage buyers to look outside Taipei

By Crystal Hsu  /  Staff reporter

Tue, Jun 12, 2012 - Page 12

The focus of the real-estate market is drifting south this year, as soaring housing prices and scarce land supply in Greater Taipei are limiting business growth and profitability.

In the first four months, land developers and life insurance companies acquired a total of 40,000 ping (132,000m2) of land nationwide for NT$24 billion (US$803 million), 80 percent of which was located outside Greater Taipei, the center of the property fever prior to the government’s imposition of a special sales levy, better known as the “luxury tax,” in June last year.

TAICHUNG

Cathay Life Insurance Co (國泰人壽), Taiwan’s largest insurer by market share, last month won a 30-year lease for NT$420 million from Greater Taichung Government to develop a vacant plot in the booming seventh redevelopment zone, according to its filing to the Taiwan Stock Exchange.

The company has inked an agreement with Ikea to turn the plot into retail space that will be used by the Swedish home furnishings giant to serve customers in central Taiwan.

Fubon Land Development Co (富邦建設), an affiliate of Fubon Financial Holding Co (富邦金控), recently completed construction of an upscale housing project near the redevelopment zone, and so has Cathay Real Estate Development Co (國泰建設), an affiliate of Cathay Financial Holding Co (國泰金控).

Hontai Life Insurance Co (宏泰人壽) recently also spent NT$1.3 billion, or NT$2.03 million per ping, on securing part of a plot measuring 1,340 ping near Taichung city hall on expectations of rising prices.

Housing transactions in Greater Kaohsiung rose to a 14-month high of 4,169 units last month, outpacing the pickup in Taipei City for three months running, based on the latest official data.

Billy Yen (顏炳立), general manager of international property consultancy DTZ, said that improving infrastructure — especially public transportation — and relatively low home prices were driving the capital migration to central and southern Taiwan.

“Developers and investors have to channel their excess funds somewhere,” Yen said.

Among financial investments, real estate has proven the best choice in terms of returns, compared with securities, precious metals, commodities and other assets, which more likely than not have generated negative yields amid market volatility in recent years, he said.

Developers also have to shift their focus away from Taipei and New Taipei City (新北市) because of diminishing land supply, while urban renewal efforts in these two cities stall.

Major developers like Farglory Land Development Co (遠雄建設) and Shining Building Business Co (鄉林建設) have teams scouting for land for development in Greater Taipei, but have met little success.

INSATIABLE DEMAND

The insatiable demand is driving construction firms and life insurers to make record offers for properties in prime locations. Fubon Life pushed commercial property prices in downtown Taipei to a new high two weeks ago by buying a nine-story office building near Pacific Sogo Department Store’s (太平洋崇光百貨) Zhongxiao East Road branch with a bid equivalent to NT$14.53 million per ping.

DTZ, the bid organizer, hopes to reproduce that Taipei experience in Greater Taichung by putting four plush apartments in the landmark complex Crystal House up for auction.

The four units — with floor area of between 104.57 ping and 222.3 ping — have reserve prices of from NT$56.29 million to NT$136.44 million, or NT$490,000 to NT$580,000 per ping, according to DTZ data.

“At only a quarter of luxury housing prices in Taipei City, these Taichung properties could sell for more than NT$600,000 [per ping],” Yen said. “The company is confident of making history in Taichung, as it has done in Taipei.”

It is the first auction for luxury housing in central Taiwan, which will help set a benchmark and make housing prices transparent for both buyers and sellers, Yen said. The auction is due to take place on June 27.

Housing prices, especially for upscale apartments, are something of a market mystery and draw close attention from the central bank, after a new building across from Da-an Forest Park in Taipei reportedly sold its penthouse unit for NT$3.04 million per ping.

The central bank has stepped up inspections of luxury home mortgage operations and plans to tighten credit controls to curb their prices after the special levy failed to trigger a correction in the past year.

Central bank Governor Perng Fai-nan (彭淮南) recently voiced concern over worsening affordability, saying he could not even buy one ping of luxury housing in downtown Taipei on his annual salary, estimated at between NT$2.6 million and NT$2.8 million.

Perng is reportedly considering capping mortgages at 50 percent for houses valued over NT$80 million in Taipei City and NT$50 million in other parts of the country when the bank holds its quarterly policy meeting on June 21.

The tightening measure might alarm the market, but would not deter developers or investors with deep pockets, said Chen Hsi-chung (陳錫宗), general manager of H&B Realty Co (住商不動產), the nation’s largest broker by number of franchises.

Rich borrowers would be able to secure funds to meet their investment needs if they wanted, Chen said.

“It is borrowers who command the upper hand in a market with flush liquidity and low interest rates,” he said. “The lenders would not turn away wealthy customers while toeing the [central bank’s] line.”

High-priced homes generate better returns and rising land costs make constructing expensive homes practical and profitable, he added.

The plot of land where Crystal House sits cost NT$528,000 per ping in 1997 and is valued at NT$2.59 million per ping today, said Chang Chung-hung (張忠弘), chairman of Productivity Architect Co (生產力建設), which developed the complex in Taichung’s most expensive location.

The company could rake in a fortune simply by leaving the land idle and trading it for capital gains, Chang said.

“However, we spent four years building the project with the latest technology to make it an artistic work,” he said, adding that he and two other partners reserved a unit each for themselves.

SHORTEST PATH

Developers with adequate capital may be biding their time when the economy turns sour as history shows “patience pays off.”

Construction firms raised prices steeply for their housing inventory after the economic downturn of 2008 and are repeating the strategy as the current slowdown pans out, H&B head researcher Jessica Hsu (徐佳馨) said.

“A shared belief that housing prices will trend up in the long run encourages the practice, which has proven rewarding for the firms,” Hsu said. “That is why real-estate investment is dubbed the shortest path to wealth.”