Hong Kong offers brokers a lightly regulated environment in which to operate and a potential client base of high-earning locals and ex-pats, says Robyn Hall

It might be over 6,000 miles away but Hong Kong is proving to be a lucrative niche market for UK-based brokers looking to capitalise on the largely untapped wealth in the region. Hamptons International Mortgages is the latest in a growing number of UK businesses looking to Hong Kong's burgeoning expatriate market as profit margins on traditional mortgage business in the UK continue their steady decline. And with some 20,000 underserved UK expatriates based in the former colony, it's a region that's ripe for the picking.

Hong Kong is now an administrative region of south-east China on the coast south-east of Guangzhou, including Hong Kong island where Hamptons' office is based. It's the hub for much of what goes on in Asia, Many companies, including some of the larger UK IFAs, use it as a base an then set up satellite operations in places such as Singapore, Malaysia, Bangkok, Tokyo and Shanghai.

Which is precisely what Hamptons has done. The Hamptons Estate Agency business is over 120 years old and is a truly International operation, with agency offices in Barbados, Oman, Mediterranean Europe, and has operated an agency office in Hong Kong since 1946, leading it to embark on establishing a brokerage to complement its services in the region.

Just last year the firm pre-sold over £20m worth of apartment in London's Arsenal FC stadium development to Hong Kong-based investors and it's opportunities such as this that led Hamptons to establish a permanent presence. Managing director Kevin Duffy says the move was simply a natural progression.

"You can't call yourself Hamptons International Mortgages and not have a genuine capability to service expatriate and continental mortgage requirements," he says.

"Hamptons has a respected agency presence in Hong Kong and we wanted to build on that. Profit margins can be better than in the UK because clients are used to paying higher fees and the staff we have in Hong Kong are paid on a commission basis so we don't have to pay inordinate levels of salary."

Loans sizes passing through Hamptons are also healthy, he says, adding that much of the business Hamptons has done so far is in the refinancing of sizeable but-to-let portfolios which were assembled in the late 1990s when rates were much higher.

As for many Pacific Rim businesses, Hong Kong serves as a commercial epicentre for Hamptons but, Duffy adds, "that's not to downplay what we are achieving elsewhere in Asia - Singapore and Tokyo are beginning to punch well above their weights".

Rob Winfield is Hamptons director for Asia, reporting directly to Kevin Duffy. Though based in Bristol, he manages the daily underwriting of cases and account relationships and travels the 12,000 mile round trip on a regular basis.

"South-East Asia is a fragmented market but it's woefully under-serviced," he says. "Local IFAs want to deal with a global brand name with the recourses to help them cultivate their client banks. This is potentially a £100m market for us."

Winfield has a permanent staff of three on Hong Kong Island, headed by regional director Roger Clarke - it's a local team that knows both the people and the territory. And this is one of the factors Duffy says has been key in Hamptons' successful start.

"One of the reasons previous entrants to Hong Kong have failed is because they have not appointed local people who know both the territory and the people," he says. "Flying staff out 6,000 miles from the UK and expecting them to settle simply does not work." And with offices in both Tokyo and Singapore, it's a lesson Duffy has learned all too well.

Hong Kong has a rich cultural history. Handed over the Chinese in 1997 after a century of British colonial rule, the colony has a strong Scottish heritage - the longest standing commercial colonialists in the region were the mighty Jardine and Matheson clans. Dominant industries have always been financial services due to the Region's incredibly benign tax regime. Commodity trading and shipping have also been strong factors in Hong Kong's development. Nearby Kowloon is now the largest freight port in the world.

Familiar banks represented in Hong Kong, in order of prominence, include Royal Bank of Scotland, Bank of Scotland, Lloyds TSB, from Belgium, Fortis Bank and from Australia, National Australia Bank, parent of Clydesdale.

But Duffy says too many UK lenders have ex-pat criteria which date back to when Tony Christie was first in the charts with Amarillo.

"Many ex-pats are based overseas because they are proven achievers in their field," he says. "Their creditworthiness, not to mention their beneficially low tax regimens, should actually be rendering them more coveted than UK counterparts, not less."

So far Duffy has garnered strong support among UK-based lenders for his ex-pat proposition.

"Cheltenham & Gloucester, Clydesdale and BM Solutions have been the most courageous in supporting our proposition," he says. "Not only will they benefit directly from our Asian pursuits but their vigour will result in them securing enhanced shares of our UK-based introductions."

Kevin Lilley, head of national accounts at Clydesdales, says the bank already has considerable experience of operating in the Asian market through its parent, National Australia Bank, with the ability to lend through the local market on local currency rates.

"Hamptons' initiative provides us with the opportunity to tap into the broker network and target the expatriate community who more often than not seek broker advice in placing their mortgages," he says.

"National Australia Bank is also a lending provider of mortgages in both Australia and New Zealand. Consequently we have the opportunity to lend to ex-pats in Australia, New Zealand or the UK via Clydesdale, against property in their home country. We will therefore be able to offer Hamptons the ability to target a considerable part of the ex-pat community in the Far-East, providing some brilliant business opportunities for both Hamptons and the NAB group."

Although the BM Solutions brand is, for the time being, better known to UK-based investors, Michael Bolton, managing director of BM Solutions, shares Lilley's sentiments.

"We have had immediate success through our relationship with Hamptons," he says. "We were happy to support its launch into this market and recognise it is a lucrative source of business. BM Solutions has always had an expatriate buy-to-let deal so we have some experience of this market. Judging by the equality of this business we have done so far with Hamptons it's certainly a market we are going to remain active in."

Though Hong Kong boasts some 20,000 UK expatriates, by far the largest expatriate community is from the US, closely followed by Australians. But, as Duffy explains, these two continents have provided Hamptons with added opportunity.

“Multi-currency borrowing is widely misunderstood and its scarcity evidences a lack of innovation on the part of certain – thankfully not all – UK mainstream lenders,” Duffy says.

“Why shouldn’t a 50% LTV borrower on a robust executive package be able to secure his UK property via Japanese yen, borrowing at rates close to 1%?” he adds.

Indeed, it’s a point backed up by Cormac Naughten, assistant director head of private clients at London-based Ecu Group, a company that specialises in multi-currency mortgages. “There’s a great deal of money that can be saved by clients who are financially sophisticated and who opt to borrow in this fashion,” Naughten says. “It can sound complicated at face value and there is an element of risk. However, when you are already dealing with clients used to foreign currency the concept of repaying your mortgage this way is not so alien.”

Naughten explains that there are significant variations in the interest rates applicable to loans denominated in different world currencies.

“For instance, over the past 20 years, the cost of servicing Swiss loans denominated in Swiss francs and Japanese yen have been some 40% to 75% lower than those applicable to loans in sterling,” he says. “The cash flow benefits of compounding such saving over two decades will be readily apparent to anyone.”

The currency calculation itself is relatively simple. Take £1m converted into Japanese yen at a rate of 180, whereby each pound is worth 180 yen. That exchange rate would give the client a mortgage of 180m yen. But as yen weakens to 200, thereby making each pound worth 20 yen, a decision is made to take profit. To switch the yen back to sterling the yen balance – in this case 180m yen – is divided by the new sterling: now 200m compared with 180m. So, 180m yen divided by 200 equals £900,000. In this basic example the loan has been reduced from £1m to £900,000.

It’s not as easy as it sounds though. Within the terms of multi-currency loan facility banks typically allow for an increase of at least 15% in the sterling equivalent of the loan.

Any of your clients considering a multi-currency loan should be able to withstand at least a 20% capital rise in the value of their loan without breaching any predetermined conversion limits imposed by their lending bank.

“This product is unsuitable for those with borrowings that are already higly leveraged against their assets,” warns Naughten.

Multi-currency mortgages aside, financial services and the provision of advice in Hong Kong in general has for years been a cottage industry. Whereas in the UK you have a number of largely respected and well known networks and clubs as well as niche firms, the market in Hong Kong is far more fragmented. Although most expatriates’ affairs would be looked after by an IFA, these could range from being a sole trader to being a member of a firm with no more than five to six practitioners. As a result, reputation by word of mouth is everything.

Perhaps unsurprisingly the provision of mortgage advice is very much a lesser priority. Many Hong Kong-based expatriates have the benefit of generous housing allowances which means they don’t own their own properties in the territory.

“It was an anomaly we noticed straight away,” says Duffy. “Of the deals done by Hamptons to date 80% plus have been UK refinances.

“Much of the property that is bought by UK expatriates in the UK is actually but-to-let business, typically city centre or urban regeneration stock which has been brought over to Hong Kong as part of an exhibition and pre-sold off plan.”

With so much financial diversity in the region you could be forgiven for thinking regulation would play a more stringent role than in the UK. But regulation in Hong Kong is much lighter and there are no formal examinations needed to practise mortgage advice.

Something that has given a major boost to Hamptons’ Hong Kong operations is that with the advent of UK mortgage regulation lenders are prohibited from receiving business direct from IFAs working in Hong Kong. This has been critical for Hamptons, having the effect of creating a regulatory vacuum. Not only that, there is also a mortgage broker market vacuum.

“Some smaller UK brokers have gone to Hong Kong and tried in vain to build a business but have in most cases failed,” explains Duffy. “Only International Mortgage Plans based in Weybridge has had any sustained success.”

When Hamptons International Mortgages had its official launch in Hong Kong last month some 150 people attended the event, including no fewer than 80 of them IFA practitioners. And the initial outlook is positive. Of the IFAs that turned out for the launch Hamptons has signed up 72 Individual practitioners and referrers of mortgage work.

“We have also signed up four firms in Tokyo, two in Shanghai, four in Singapore and a leading firm in Bangkok. Plus we have agreed five white label arrangements with larger firms including the Henley Group and MBMG,” enthuses Duffy. “Our proportion is truly pan-Asian. We’re receiving over 50 warm enquiries a week and have placed over £20m of loan finance.”

It’s been a good start and Duffy estimates that by the year-end Hamptons International Mortgages will be brokering over £10m a month out of Hong Kong and the surrounding Asian market.

“At present we have a clear run in Asia,” he boasts. “Our stake is firmly in the ground and we are going to defend our position with the ferocity of Samurai warriors. It’s been a challenging nine months getting this far but the rewards are now coming through in spectacular fashion.

“In years to come we will all look back on 2005 as a defining year of our industry but not purely because of regulation,” he says. “Don’t believe the spin you read these days because I can tell you that these are the toughest trading conditions for mortgage practitioners in over 10 years.

“The businesses that will come through this are those that either steal market share through being cost-competitive or those that take entrepreneurial and creative steps to open up fresh markets. That’s the story of Hamptons Hong Kong.”