State,Class and Capital: Gentrification and New Urban Developmentalism in Hong Kong

Introduction

Although the literature on gentrification has been critically concerned about the issues of class displacement and socio-spatial justice (Glass, 1964; Ley, 1996; Rose, 1984; Smith, 1996, 2000, 2002), in recent years some scholars (Butler, 2003, 2007; Hamnett, 2003, 2009, 2010) have attempted to portray gentrification as an evolving process of class replacement and post-industrialization. Decoupling the concept of gentrification from class conflict, they argue that the increasing population of the middle class in cities caused by deindustrialization and the expansion of financial and service sectors – rather than the capitalist imperatives to accumulate and to exacerbate class inequalities – is the driving force of gentrification. This revisionist take on gentrification, and its attendant capitalist triumphalism, has been endorsed by some scholars of East Asian urban studies who tend to see urban gentrification in cities such as Shanghai and Singapore as beneficial projects engineered by urban states and the private sector for the purpose of improving citizens’ quality of life (Hogan et al., 2012; Li and Song, 2009). The rise of the new middle class and proliferation of desires for an elite way of life in these cities have subsequently shaped a clean-sweep approach to urban redevelopment, one that has favoured urban mega-projects and large scale developments (Wang and Lau, 2009).

In Hong Kong, public opinion has recently shifted in the opposite direction. In the past, the economic miracle of Hong Kong seemed to serve as a successful case of urban gentrification and a fast-growing middle class in East Asia, and to provide evidence to support the triumphalist view. However, this is no longer the case in recent years. For instance, the public images of Li Ka-shing, one of the key Hong Kong property developers dubbed by the media as “Superman” and a homegrown capitalist hero in the booming years for property and stock markets, have arguably fared worse over the past two decades. Protesters repeatedly portray Li as “devil” for his economic and political dominance. Since the year of 2010, after the publication of a bestseller titled Property Developer Hegemony in Hong Kong, the Chinese term “Property Hegemony” (dichan baquan) has become a catchword. According to a survey conducted in 2011, 85% respondents had heard about this term among which 77.9% believed that “Property Hegemony” really exists and 73.3% found it “serious” as a social problem (Hong Kong Institute of Asia-Pacific Studies, 2011). It is not simply a story of the changing public image of a tycoon but also about the dramatic transformation of Hong Kong’s status quo, i.e. its administration, political machinery, and the path of urban development, in which people have gained, lost, and suffered.

In a nutshell, the popular discontent with property development stems from a process of decoupling the people, not only the lower class, from urban changes. What really matters for understanding this process is not primarily the strategies and intensity of redevelopment, but the spatial-economic changes that have been triggered by the city’s increasing politico-economic integration into China. In this paper, I argue that while the expansion of the middle class and their housing and investment demand played a role in the development of a property- and finance-led regime of accumulation before the Asian Financial Crisis in 1997, since the early 2000s, urban gentrification in Hong Kong has no longer been managed and regulated by a city-state power with a relatively stable accumulation regime, i.e. a balancing of production, distribution and demand within limits which are compatible with social cohesion (Boyer, 2000). Instead, it has increasingly become a finance-led growth model engineered by the local and central states whose diverse neoliberal interventions and political calculations persistently have led to the destabilization of given social boundaries and coherence, leading to widespread discontent with property developers and their power.

Drawing on a recent wave of scholarship on the non-western paths and institutional mechanisms of urban development (Lees et al., 2016; Park et al., 2012), this article offers a critical account of the twists and turns of Hong Kong’s urban development by focusing on class recomposition, state strategies and their relationships with the city’s changing regional politico-economic environment. It thus places emphasis on the politically and ideologically contested nature of urban space (Brenner, 2009: 198, 204), and attempts to offer a historical-systematic analysis of the roles of both the middle class and state actors in urban gentrification. In what follows, I first foreground the significance of Hong Kong’s experience in the context of the gentrification debate and recent scholarship on urban development in East Asian cities. I then conduct an empirical assessment of the rise and fall of the middle class and their relevance to urban gentrification in Hong Kong with census data and other statistics. Inspired by the call for paying attention to the multiple paths of gentrification and its changing forms (Davidson, 2010; Davidson and Lees, 2005; Park et al., 2012; Shin, 2009), I proposes a theoretical account for understanding the recent wave of urban redevelopment and other strategies of urban upgrading and the new and diverse roles of the state in this process. Finally, I take the case of Wan Chai’s serviced apartment project as an exemplar of the diverse urban spaces oriented towards the global and regional capital flows and elite networks that mark Hong Kong’s new urban developmentalism.

Hong Kong’s Path to Gentrification

Unlike that of other successful East Asian countries which experienced late industrialization, post-industrial turn and rapid urban growth under a strong developmental state (Amsden, 1989), the case of Hong Kong is quite unique. Since it was established as a Crown Colony, Hong Kong had served as an entrepôt primarily for the British Empire’s pursuit of power and wealth in the Far East. Instead of being committed to any long-term project of nation-building and development, the colonial elites engaged themselves in managing a politically stable social order and a business hub, yet were hypersensitive to changes in the international economy and geopolitics, especially at a time of China’s political turbulence. Hence, Hong Kong is neither a nation-state (such as other East Asian countries) nor a city-state with its own national sovereignty (such as Singapore). The thesis of “developmental states in East Asia” (White, 1988; Chan et al., 2006) is inadequate for taking account of the politico-economic nature of Hong Kong’s city-state because the term “developmental state”, implicitly constructing the sorts of nation-states that came to dominate the western world after the nineteenth century, obscures the fact that different kinds of state, such as colonial state and city-state, were viable in history and at present. It tends to provide accounts of state-to-state variations and comparisons, rather than understanding of the relations among them (Boyd and Ngo, 2005). In general, Hong Kong’s postwar urban changes have to be understood as a part of a process of remaking the city-state, of indigenizing colonial power as a set of governing strategies (Law, 2009: 168), and of an eventual subordination of the managerial-capitalist state into China’s newly emerging politico-economic structure in recent years.

Hong Kong’s industrial take-off, like the stories of other “East Asian Dragons”, happened in the American-led East Asian liberal hegemonic order and its containment of the rise of Communist China and the Soviet Union. However, what defined the economic path of Hong Kong’s postwar years was not a state-led developmentalist project per se. Instead, taking advantage of capital flight and refugees as a source of cheap labour from China, the Hong Kong economy was successfully rebuilt with flexible production and small enterprises in response to the favourable international and regional markets. The colonial state, rather than implementing unambiguously laissez-faire policies as neoliberalists and the local power elites suggested (Friedman, 1981: 54; Rabushka, 1979: 83), successfully regulated economic activities by providing mass provision of subsidized housing for low-income groups, making determined interventions into financial markets during the crisis years, and pursuing selective collaboration with business groups for strategic purposes and government control over all land supply for facilitating property development and large-scale redevelopment (Schiffer, 1991).

The first wave of Hong Kong’s urban gentrification, in parallel with the property boom of the 1980s and 1990s, occurred in the midst of China’s economic reforms that had attracted the local manufacturing sector to relocate to the Mainland. This new regional division of labour, in return, contributed to the huge inflow of capital into Hong Kong’s financial, property and service sectors (Chiu, 1994; Smart and Lee, 2003: 164). In response, the colonial state always adopted neoliberal ideology by pragmatically making rules and actively intervening into economic affairs to serve the power elites’ interests. The last two decades of colonial rule became the first moments that the state seemed to successfully manage a middle-class society characterized by a regime of accumulation that more or less delivered economic prosperity to most people, won public consent by offering upward social mobility, and assisted the shift of deindustrialization.

Under this regime, gentrification, as a set of practices and strategies of urban upgrading, was previously termed as “urban renewal”: a process referring to clean-sweep redevelopment of old tenement houses in favour of building high-rise residential blocks and office towers (Ley and Teo, 2014). From the early 1980s to 1996, the property bubble coincided with the rise of the middle class and their purchasing power. Figure 1 shows the soaring property price index before the Asian Financial Crisis in 1997. Meanwhile, the proportion of the middle class (“Managers and administrators”, “Professionals” and “Associate professionals”) in the total working population increased from 8.7% to 29.2% in this period (Census and Statistics Department, 1992a: 94; 2002: 23). The monthly household income in all decile groups increased significantly. In the 8th–10th decile groups, the range into which most of the middle class fell, the growth rate reached more than 10% every five years. (Census and Statistics Department, 2002: 25). The rapid growth rate of homeownership, from 28% in 1981 to 51% in 2001, offers further evidence of the rise of the propertied and middle class (Census and Statistics Department, 1992b: 64; 2002: 70). The theory of class replacement seems to be sustained with regard to the urban gentrification of Hong Kong in these two decades.

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Figure 1.

Rental indices and property price indices in Hong Kong (1981–2001). Source: Rating and Valuation Department (1981–2001), Hong Kong Property Review. Hong Kong: Hong Kong Government (1989 = 100).

However, this class replacement process should not be understood as a natural outcome of the market economy. First, the colonial government pursued a large-scale public housing programme for resettling squatter populations and helping low-income tenants for various pragmatic reasons since the 1950s (Castells, 1986; Smart, 1992), and adopted other urban policies such as the provision of rental housing for low-income groups, subsidized homeownership for the lower middle class, and relocation of residents to new towns at the outskirts of the city. These policies maintained social stability and made room for property development in the inner city. Second, the effect of the rise of the middle class and their residential needs contributed only a small part to the property bubble in Hong Kong, compared to expectations of capital gains and huge demand from investors (Tse et al., 1999). For instance, Alan Smart and James Lee compared the indices of rental and house prices to show changes to the property market before 1997. While these two indices converged in the 1980s, since the late 1980s, the rental index has lagged far behind the soaring house price index. Middle-class families have engaged themselves as investors rather than simply home buyers in this process; together with the institutional investors, they have fuelled speculation for profit with the expectation that the rise of property prices will never end (Smart and Lee, 2003: 160–61).

This speculation has been fuelled by a finance-based and property-led regime of accumulation that has spurred changes not only in economic structure but also in government policies and even the everyday practices of ordinary residents (Sum, 2002: 74). By sustaining aspirations of achieving social mobility, this regime successfully created a stable population, and a social imaginary and territory on which capitalist state authority, decision-making and management are seen as binding (Jessop, 2016: 73). Hong Kong’s property developers have been perpetuating this vision of the local economy, including its service sector, stock market and banking sector since the 1990s, and have gradually become an echelon of powerful elites. In the 1990s, most listed Hong Kong companies were property-related and the largest five of them accounted for 70% of the private property market (Haila, 2000; Mitchell and Olds, 2000; Renaud et al., 1997; Tse and Ganesan, 1999: 71). Whereas Hong Kong’s financial economy during this period, particularly the stock market, thrived with the dominance of the property sector, revenues from land sales and other related taxes accounted for over 30% of the total government revenue (Smart and Lee, 2003: 159).

The establishment of the Land Development Corporation (LDC, established in 1988), a publicly founded and financed corporation operating according to “prudent commercial principles”, was illustrative of the government’s desire of actualizing urban rent and its shared interest with property developers. Running through planning documents and official statements of the LDC was a dominant discourse that defined the inner city as a space of urban decay in urgent need of redevelopment favouring the property sector. The LDC was tasked with overcoming the problem of multiple ownership and residents’ rights to the land, which makes land assembly extremely difficult for private developers seeking their profit. It was thus empowered with the ability to request resumption of the government’s ownership rights to the land in order to promote redevelopment (Planning, Environment and Lands Branch, 1996).

The case of the LDC demonstrates that the government attempted to make private interest of redevelopment equivalent to “public interest”. And the fact that Hong Kong’s finance-led growth regime and its “wealth effect” have formed a disproportioned reliance on the property sector since the 1980s also made the general public take it for granted (Ley and Teo, 2014: 1298). The importance of the middle class in Hong Kong to urban gentrification in the 1990s, rather than a simple cause, is a hegemonic process of consensus-making and interest-alignment (Gramsci, 1971; Loopmans, 2008) in which individual home buyers, institutional investors, property developers and government shared the profit derived from property speculation and the optimistic expectation of Hong Kong’s capitalist economy. Few challenged Hong Kong’s middle-class dreams.

State and Capital in the Post-1997 Era

All of a sudden, the economic miracle of Hong Kong was shattered after it was hit by the Asian financial crisis in 1997, the time of the return of the city to Chinese sovereignty. The big slump of the property market and a deep recession followed. It was estimated that about 130,000 households (Poon, 2011: 69), mostly middle class, were facing negative equity at the turn of the century. What makes the path even more dramatic is not simply the post-2003 economic boom and further integration with China’s economy, but also the shrinking confidence in Hong Kong’s dream for better life and social mobility.

The Asian financial crisis provides a lens through which to observe the interaction among the different actors in urban regeneration. Since 1997, property prices had plunged drastically for six years (Figure 2) resulting in slowing down the process of urban gentrification due to weak investment incentive and the shrinking purchasing power of the local population. The market downturn was not confined to the property sector but the whole economy, thereby resulting in a vicious circle. After the Asian crash of 1997, home buyers and investors adopted an even more rational and forward-looking approach in forming their expectations of capital gains (Wong et al., 2005: 760). Individuals largely followed, rather than led, the market and its signals. Henceforth, one should look for factors other than the housing demand of the middle class to explain the market rebound happening in Hong Kong after 2003 (Tse et al., 1999).

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Figure 2.

Rental indices and property price indices in Hong Kong (1998–2015). Source: Rating and Valuation Department (2008–2016), Hong Kong Property Review. Hong Kong: Hong Kong Government (1999 = 100).

Another reason for the declining significance of the middle class to urban gentrification is their purchasing power. From 2003 to 2015, the property price index and rental index increased by 362% and 133% respectively. Median monthly domestic household income increased by 25% although the size of the middle class grew by about 40% (Census and Statistics Department, 2017: 78). In spite of the mushrooming of new residential projects in new towns as well as old districts again in recent years, the purchasing power of the medium-income groups remains stagnant. According to the Census and Statistics Department, the homeownership rate reached a record high of 53% in 2006 and then slowed down to in 52.1% in 2011 and 48.5% in 2016 respectively (Census and Statistics Department, 2017: 87). Now more people, especially the young ones, no longer believe that economic prosperity can benefit the whole society, except a minority of business elites and propertied class. In combination with the emergence of post-materialist values, socio-economic grievances spur more hatred against the business-dominated and developmentalist regime (Ma, 2011).

A stronger explanation for urban gentrification could be found on the supply side, particularly government’s interventionist policies which attempted to reactivate the property-led model of development. In the midst of Hong Kong’s struggle for economic recovery, the post-handover government was extremely eager to out-perform the previous colonial regime in solving social and economic problems (Cheung, 2000: 301). Contrary to other East Asian countries’ path of triumph of neoliberalism over state-led developmentalism in practice and rhetoric (Chang, 1998; Pirie, 2005), the Hong Kong government’s faith in interventionist measures and stimulus packages, overriding its previous pro-market stance, was further strengthened by Chief Executive Tung Chee-hwa’s rhetoric of the “new vision” in 1997 (Tung, 1997: para. 3) and his success in rescuing the stock market and the currency rate from plunging into further crisis in 1998.

The Hong Kong government had been planning ahead of the market in order to deliver urban renewal more quickly, particularly after the financial crisis in 1997 when the unstable and gloomy property market situation discouraged private developers from engaging in urban redevelopment (Planning, Environment and Lands Bureau, 1999a; 1999b: 2). Urban renewal was seen as one of the measures for rescuing Hong Kong from economic recession. In 2001, the setup of the Urban Renewal Authority (URA), in replacement of the Land Development Corporation (LDC), was used to continue the clean-sweep approach to redevelopment by broadening its scope to incorporate other strategies such as “rehabilitation”, material incentives to flat owners for carrying out repair work, and “preservation”, physical refurbishment and reuse of old buildings. A new concept of “revitalization”, together with other “Rs” (Redevelopment, “pReservation” and Rehabilitation) to make the slogan of the comprehensive strategy of the “4Rs”, was introduced to link up the previous strategies for urban regeneration. At the same time, the “prudent commercial principles” of the LDC were replaced by “prudent financial principles” which allowed the URA to undertake some loss-making projects cross-subsidized by other profitable ones. In the first five years, the URA was granted HK$10 billion by the government as capital injection for its future projects. The government provided the Authority with a list of planning parameters and financial guidelines, which include 225 project plans, redevelopment priorities, and a list of historical buildings to be preserved, among others.

Apart from these interventionist strategies, the power to skip bureaucratic red tape mainly defines the character of the URA, which is a statutory body of very limited accountability and public engagement, unlike the LDC (Ng, 2002: 145). In the past, the LDC was required to take “all reasonable steps” to acquire the land before it requested the government to use the power of resumption (a power akin to eminent domain in the USA). Now the URA may apply for land resumption through the Secretary for Planning, Environment and Lands (Secretary for Development after 2007) to the Chief Executive with no need to fulfil any requirement of negotiation and acquisition offer (Ng and Tam, 2000). For the expediency of urban renewal, the URA’s power to implement urban regeneration is strengthened by centralization of power and deeper state intervention into the urban process.

However, in light of the Hong Kong government’s repeated failures to revitalize the economy, one may conclude that the institutional reshuffling of the URA could not on its own effectively trigger a property bubble without considering the Chinese government’s own policies for Hong Kong since 2003. In other words, the path of Hong Kong’s urban gentrification is indicative of not simply the local state’s new strategies, but also the central state’s new interventionist measures.

Following China’s admission to the WTO, the Beijing government and its local corporatist allies put forward the Closer Economic Partnership Agreement (CEPA) to further institutionalize and broaden the scope of economic integration. Unlike most free trade agreements, the idea of CEPA was not negotiated and carefully studied by equal parties; instead it was first proposed by the Hong Kong General Chamber of Commerce and followed up by the Beijing government very quickly. It was intended to shore up the legitimacy of the first Chief Executive Tung Chee-hwa and his government by rescuing the local economy from recession. Instead of pursuing a fundamental change of Hong Kong’s economic structure, CEPA reinforced Hong Kong’s role as a financial centre and service hub by bringing in a huge flow of capital and visitors from mainland China, and opening its gates to Hong Kong-based capital and professionals. On the one hand, China has helped fuel Hong Kong’s property and stock market, and stimulated the service and retailing sectors. On the other hand, investment banks, hedge funds, regional headquarters of multinational companies, high-end producer-services providers such as accounting, auditing and consultancy firms, etc., have expanded their business ties into China through this offshore hub and business centre (Meyer, 2008).

As a result, capital inflows and outflows, in foreign direct investment (DI) and portfolio investment, have been both large and volatile in recent years. Mainland China has become Hong Kong’s largest recipient and investor region of outward and inward DI respectively. The fact that both the net capital outflow and inflow has grown since 2003 reflects Hong Kong’s growing role in financing the rise of China’s economy, including Chinese firms and foreign capital looking for investment opportunities in China and abroad (Figure 3). For example, the amount of equity funds raised by initial public offerings (IPOs) of H-share companies (companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange) has increased by 350% from 2003 to 2015 (Securities and Futures Commission, 2016). The strong but volatile flows of capital and people eventually generated a robust yet fluctuating demand of space and investment. For example, the number of regional headquarters and local offices in Hong Kong increased by 46% and 143% respectively from 2002 to 2016. It is no surprise that the property price index roughly parallels the increase of global and regional capital flows rather than domestic housing demand. In the following section, I will take Wan Chai as a case study, with particular attention to the rise of the serviced apartment as a new landscape of urban gentrification.

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Figure 3.

Foreign Direct Investment in Hong Kong and abroad (1997–2015). Source: Census and Statistics Department (HKD million).

Wan Chai and the Rise of the Serviced Apartment

Wan Chai, one of the first Chinese settlements and developed areas on the northern shore of Hong Kong Island in the 19th century, is close to Central, the central business district of Hong Kong (Figure 4). The coastline of Wan Chai has been extended northward through a series of land reclamation schemes since as early as 1841. Reclamation after the Second World War further extended the boundary of Wan Chai to the areas where the new North Wan Chai commercial district, developed in the 1980s, is located today (Figure 5). While new development mainly took place around it, the Chinese settlement at the heart of Wan Chai (a neighbourhood mainly characterized by traditional markets, small shops and relatively low-rise residential blocks) underwent a relatively slower process of development, resulting in a significant number of Cantonese tenement buildings being left intact until the intervention initiated by the URA in the 2000s.

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Figure 4.

Wan Chai, Central and Tsim Sha Tsui.

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Figure 5.

J Residence, J Sense and Woo Cheong Pawn Shop.

The Johnston Road project, one of the URA’s earliest projects, featured a mix of serviced apartments, historic preservation, and high-end dining and shopping landmarks. Before its dissolution, the LDC agreed to preserve some pre-war buildings located in the inner city such as the Woo Cheong Pawn Shop in No. 66, after the Antiquity and Monument Office included it in the preservation list in 1999. In spite of this, the government did not change its stance that economic development should not be compromised by cultural concerns. Stephen Fisher, Deputy Secretary of Planning and Environment, stated very clearly that the plot ratio of the preserved building would be transferred to other redevelopment sites (Sing Tao Daily, 2000). In other words, it would not pose any barrier to the imperative of redevelopment although the URA diversified its mission. From the very beginning, this project was made commercially possible, feasible and desirable by the government’s policy discretion on plot ratio.

The Johnston Road project, located at the junction of Johnston Road and Ship Street, is a site covering 1,970 square metres, as one of the three priority projects. In mid-2002, less than one year after its founding, the URA publicly announced the project and began negotiation with the owners and acquired 80% of the ownership in six months. The rest of the owners, for example, the owner of Woo Cheong Pawn Shop – the Law family, running a small listed company in Hong Kong – refused to accept the URA’s offer. Law Sau-Yiu, managing director of the company, said that although the offer given by the URA was not unreasonable according to the market situation, the timing was not good for selling property. During the worst years for the financial and property market, Law preferred to keep this old building for a better price in the future (Xin, 2002). During a standstill in the negotiations, the Land Resumption Ordinance proved to be a powerful tool for redevelopment. In early 2003, after it announced its intention to apply for resumption of government land, more than 90% of owners accepted the URA’s offers. It finished the acquisition in October 2003 and then announced the tender of development partnership in January 2004. The URA followed the quick procedure of compulsory land resumption and a tight development schedule to override owners who were holding out. In this case, time compression was enabled primarily by the state who strengthened its capacity of intervention and expanded its scope of power to forcefully take advantage of the rent gap between capitalized ground rent and rent potential (Smith, 1996).

In the midst of the property slump it was estimated that the cost of acquisition of the Johnston Road project, HK$880m, was so high that the Authority had to bear the risk of redevelopment (Oriental Daily, 2003). Under the rubric of “holistic strategy”, of which historic preservation is a key component, the URA was justified in receiving various government subsidies including premium exemption for this project (HK$191m) and 41 other projects (Development Bureau, 2010: 42). A spokesperson for the URA stated clearly that the projects in Wan Chai aimed at generating “the Wan Chai old town as a new precinct of quality residential, leisure, shopping and commercial activities with preservation of local and historic character” (Press release by URA on 12 January 2004). “The key is not about the project per se. Instead, it is about how to integrate with projects, whatever redevelopment, resurrection, beautification, revitalization, or historic preservation, as a synergy. It makes Wan Chai and Hong Kong more lively and glamorous”, said Billy Lam Chung-Lun, the Chief Executive of the URA, in a conference held in Shanghai in 2005 (Lam, 2005). Behind the fancy language around the term of “Wan Chai old town” lies the rescaling process in which the land value of a place (“old town”) was boosted. “Wan Chai old town”, in the URA’s document, refers not to the administrative district, but to the area south of the Hennessy Road, i.e. a new socio-spatial configuration in proximity to the relatively new business district on the waterfront and Central (Brenner 2004: 13). In 2007, revitalization of Wan Chai was even included in the Policy Address of 2007 by Chief Executive Donald Tsang (Tsang, 2007: 24).

This rescaling and zoning process has been taking effect during the rebound of Hong Kong’s property market since 2003. In 2004, the Johnston Road project, a site with a plot ratio of 1:10 and a 43-storey apartment building (including a three-storey shopping mall), was estimated to provide more than 300 apartment units at the price of HK$50,000 per square metre and several ground floor shops at a cost of HK$100,000 per square metre (Hong Kong Economic Times, 2004). In the same year, K. Wah International Holdings Ltd (K. Wah), a local developer, won the joint contract for this project in a public tender exercise. The URA owned 40% of the shopping mall and shared a percentage of the revenue from the sales of apartments while the private developer got 19,510 square metres of area at the cost of HK$600m (around HK$31,000 per square metre).

This project, offering 381 studios, including 290 one-bedroom, 87 two-bedroom apartments, and 4 penthouses, targeted the market of serviced apartments for business visitors and corporate expatriates rather than local families. Hong Kong’s serviced apartments, a small niche of the Hong Kong property market until recently, began with a handful of “hotel-like” projects completed by local developers in the 1980s (Mcmillan 2009). In the mid-2000s, except for several old buildings renovated into serviced apartments such as Pacific Place Apartments (2004), no new residential block was built for this purpose in Wan Chai. The Johnston Road project followed the decision of the Town Planning Board (TPB) on deleting the term “Service Apartment” (SA) from all statutory outline zoning plans and categorizing it as residential use in 2000 (Director of Planning, 2005). It encourages more conversions of existing commercial and residential buildings for serviced apartment use. The fact that close to 70% of them were opened after the year 2000 when professional property management chains began to enter the market can attest to the effect of the TPB’s deregulation (Jones Lang LaSalle, 2009: 5, 9–11).

Along with the recovery of the property market since 2004, the immediate consequence of the URA’s projects is the valorization of the development potential of the “Wan Chai old town” at an exponential rate. Before the completion of the project, in which the residential building is named as “J Residence”, the developer already received an offer of HK$75,000 per square metre (Sing Tao Daily, 2006) for six apartment studios from a foreign company for staff accommodation. Completed in the summer of 2007, it was such a big hit in the market that the price of some studios reached as high as HK$100,000 per square metre. With this historic building and the newly built shopping mall “J Senses”, K. Wah International envisioned a new zone called “Soho East”, east of the current “Soho” and Lan Kwai Fong in Central. The URA and the private developer, attempting to connect the “Wan Chai old town” with the trendy districts of pubs, cafes, restaurants and galleries, etc., that surround the central business centre, triggered the effect of “revitalization” to the whole area of “old town Wan Chai”. In early 2009, the Lung Moon Chinese restaurant, a mid-20th century building just a few blocks away from J Residence, was sold at the price of HK$250,000 per square metre: almost three times the price of the pawn shop offered to Law by the URA in 2003.

Since then, dreams of profiting from serviced apartments have stimulated property investors’ minds. Following the URA’s projects such as J Residence and Queen’s Cube (completed in 2010), more real-estate developers have been attracted to new build and renovation projects for serviced apartments, such as Fraser Suites (2007), Garden East (2009), and Chi Residences (2013), etc. Wan Chai has become a residential concentration of business visitors with the third largest serviced apartment stock (1,653 units in 2012) in Hong Kong. It was estimated that the number of business travellers, overseas residents with employment visas, and local small domestic households, who need serviced apartments, would reach 4.75 million per year, among which almost 4 million are non-local people. However the supply is still very limited and unsteady. The growth rate remained 415 units per year before 2001 and increased to 1,119 units per year during 2002–2011, yet dropped recently due to scarcity of urban land (Savills (Hong Kong) Limited, 2013).

The market for serviced apartments is the sub-market of property most responsive to the volatility of the financial market; it is intended for foreign business elites rather than local residents. The expansion and operation of the financial sector and producer-services generate a sizable number of vacancies to be filled by people from overseas, who stay for years, months, or even weeks. However, the bursting of the financial bubble would result in a sudden decline of foreign recruitment and expatriates. According to a survey, while the occupancy rate had been around 90% since 2004, it plunged to 75% abruptly during the Subprime Mortgage Crisis and rebounded to over 90% in 2010 (Savills Research, 2011a; The Apartment Service Worldwide, 2011: 28). However, it dropped again to about 76.7% in 2016 (Savills Research, 2016). The movement of the rental index of serviced apartments follows a similar pattern (Savills Research, 2011b) and it has achieved a growth rate of 60% from 2003 to 2015, higher than the rental index of property (Savills Research, 2015).

On the supply side, the high rate of yields and steady demand attract a wide variety of investors, ranging from local property developers, international management chains, and individual investors to financial institutions. Although the serviced apartment market remains small with about 18,625 units, around 2% of the residential market and 25% of the hotel market, some surveys have suggested that the gross yield of around 8–11%, higher than other sectors of the property market, makes it a very promising business (Jones Lang LaSalle, 2009: 11; Savills Research, 2011a; Savills (Hong Kong) Limited, 2013). While the major stock of serviced apartments is largely provided by local major developers such as Cheung Kong and Hang Lung, a large group of international and regional operators such as Marriot, Ascott International, Shama, Kush Concept, and Chi International, share the market with the local major players such as New World Properties and Hopewell Real Estate. The growing investment opportunities attract individual and institutional investors such as investment banks like Morgan Stanley, whose market expectations are largely shaped by the global outlook as well as local fundamentals. Henceforth, compared to the local residential property market, the investment demand of serviced apartments is more institutionally complicated, multi-layered and globally linked. Thus, Wan Chai has been undergoing urban gentrification in a highly globalized way.

Conclusion

If gentrification is defined as a change of the population of land users such that those of higher socio-economic status succeed the previous ones, Hong Kong’s inner city has experienced it over 40 years. However, as Lees et al. have suggested, the role of the middle class in gentrification needs to be reconsidered, as it is increasingly the creation of the state, both local and national (Lees et al., 2016: Chapter 4). In Hong Kong, the middle class, as a part of the finance- and property-led regime of accumulation, mattered more in the citywide property boom and the rise of gentrified neighbourhoods in the 1980s and the 1990s (Smart and Lee, 2003). However, in the past two decades, their housing needs can no longer explain the volatility of the urban changes.

In this decoupling process, the institutional mechanisms involved deserve further study and theorization. While the change of sovereignty without democratic reform made the government more susceptible to pressure from sectoral interests (Cheung, 2000: 303), the corporatist conflict gained momentum since the late 1990s and turned into an intense competition for Hong Kong’s urban vision from the late 1990s to the years of economic crisis (Jessop and Sum, 2000: 2301–04). With the decline of local purchasing power, the URA and its new strategies and visions proved to be a commercially successful example of state-led gentrification which stimulates effective demand for investment.

The second force is the capital flow and investment demand facilitated by the Chinese Communist regime which embraced the global economy in all aspects after the 1990s. The flow of capital, the concomitant business visitors, and relocation of local offices and regional headquarters to the city in order to capture Chinese business opportunities, are primarily attributed to the global financial bubble as well as the Beijing government’s politically intended policies. As a result it triggered a new phase of urban gentrification in Hong Kong. The property- and finance-led regime, despite losing the “wealth effect” on the local population in the immediate years after 1997, created an institutional path on which the local state inclines to seek further financial sources and opportunities from China, rather than launching a fundamental breakthrough. Hong Kong’s path-dependency fits in with the Chinese government’s long-term project of eventually incorporating its frontiers, Hong Kong, Macau and Taiwan, into its national state structure and global capitalist power. In short, the recent wave of urban developmentalism is also a geopolitical process of remaking the post-colonial city-state’s relationship with its central state.

The rise of serviced apartments, as a niche property market, a type of mobile residence and a globally connected and locally disconnected urban form, is not merely characteristic of global capital–human mobility and splintering urbanism (Graham and Marvin, 2001; Soja, 2000: 235): together with the huge influxes of mainland visitors and the sprouting of shops and malls catering to mass tourism, it constitutes an urban landscape beyond recognition by the locals, fuelling popular resentment. Although China gives the city a magic ticket to future prosperity in a globalized world, the changes make Hong Kong people increasingly find a dystopia in which they strongly feel alienated from their homeland (Ip, 2015).