Property is big business in Hong Kong, with its limited space and high-value rentals.
But buildings aren’t just sold as whole properties. Sometimes, investors purchase individual floors.
This practice began in 1952 when developer Ng Tor Tai set up a new ownership structure for two of his buildings.
By selling floors individually, he made it easier to invest in office property, and so for developers to find the buyers they needed.
The market in Hong Kong office floors has taken off in the past few years.
Prices for office space have more than doubled over the course of a decade, increasing the potential profit for investors in this sector.
Lower stamp duties than for residential property add to the appeal.
High profile investors have started buying and selling office floors at unusual speed and for remarkable profits.
Logistics heir Johnny Cheung Shun-yee supposedly made around HK$900 million (£87 million) by buying and selling two floors of high-priced office space in nine months.
Flipping office floors is now a thing in Hong Kong. And where investment is concerned, where Hong Kong leads, the rest of the world is likely to follow.
The sort of ownership systems that allow these deals aren’t unique to Hong Kong.
Known as strata titles, these forms of ownership have been available in Australia since the early 1960s, then spread to Canada, New Zealand, India, Singapore, and beyond.
Even in countries that don’t have a strata title system, it’s often possible to achieve something similar through different legal mechanisms.
Strata titles were created to make it easier to divide ownership of large office blocks.
Like any ownership system, they’ve created possibilities for investors.
Owning an office property is outside the financial scope of many investors, especially in expensive cities like Hong Kong, London, or New York.
That can make rising values in city centres accessible to only the very richest.
But by buying a floor of a building, more modest investors can benefit from soaring city centre property values.
In Hong Kong, this is still a game for the super-rich, thanks to the city’s particular economics.
But elsewhere in the world, it has the potential for broader use.
Benefits of Commercial Property
Commercial property has some advantages as an investment.
Almost all property retains its value over the medium to long-term, thanks to physical limits on what can be built, especially in prime spots.
This makes it a safe choice at times when the markets look uncertain.
By improving a property, you can increase its value, which is likely to rise anyway with inflation.
And by renting it out, you gain a steady income stream.
But investing in residential property can sometimes be a stressful experience.
Chasing rent and undoing the damage of neglectful tenants means extra work you wouldn’t face with stocks or bonds.
Commercial property often provides a better option.
Commercial tenants tend to take good care of property, as they need to present a good business front, and they’re usually reliable about rent.
Property in up-and-coming commercial areas can be particularly valuable. Good location is vital for a business and so provides a unique selling point.
A Chance for Short Term Property Gains?
The biggest downside of property investment is its impact on liquidity.
Property is usually a long-term game. Sinking a lot of money into it can mean you don’t have the option of other investments.
Property flipping lets investors benefit from rising prices without becoming bogged down in those long-term commitments.
It’s led to floor flipping deals worth a total of $40 billion in Hong Kong over the past five years, while New York has seen $32 billion worth of these deals in the same period.
It’s even being used by companies to make investments they couldn’t otherwise afford.
Henglilong Investments Ltd. recently began moves to buy two major Hong Kong office towers, using high-interest debt to raise funds.
Their strategy relies on selling off individual floors to quickly get out of that debt. It’s a risky move, but one with potentially huge profits, if Hong Kong’s office prices continue to rise.
Though the biggest office floor flips are taking place in Hong Kong, it’s a growing business elsewhere in the world.
Property prices in major financial cities show no signs of decline, and schemes like the Henglilong one shows the flexibility that strata titles provide for investors.
Flipping floors isn’t for everyone. But as an investment option, it’s on the rise.
For a property-focused investor, it may represent a better option than flipping houses.
Also read: How Blockchain Technology will Transform the Commercial Property Market