Situated between the Pearl River Delta and South China Sea, Hong Kong is a multi-faceted, cultural hub as a result of being both inherently Chinese and under previous governance by the British Empire. It is a major hub in East Asia and a unique destination that has absorbed people and influences from places as diverse as India, Vietnam and Australia and occupies a place as one of the world’s major cities despite its relatively small size. While now part of China, the former colony continues to flourish with a high degree of autonomy and its population of just under seven million enjoy cultural and financial freedoms unheard of on the mainland.

As much of Hong Kong’s terrain is characterised by dense woodland and steep, mountainous slopes, less than 25 percent of the territory’s land mass has been developed, and about 40 percent of the remaining land area is reserved for country parks and nature reserves. Most of the territory’s urban development exists in three zones: the Kowloon peninsula, along the northern edge of Hong Kong Island and in settlements throughout the New Territories.

This lack of space has led to a cityscape of super dense, high-rise tower blocks housing over 60 percent of its population and is a crucial factor in making the property market one of the most challenging in the world (it is currently 55 percent more expensive than London). Home prices in Hong Kong have been driven by low borrowing costs, a lack of new supply and an influx of foreign buyers, typically from China. To stabilise the market, the government have pledged to make more land available to build 20,000 housing units each year and raise property taxes to deter speculators.

Most government land sales in recent years have been triggered by the so-called application system whereby developers promise to pay minimum amounts for sites on a list of available lots leading to a public auction. That system was put into place in 2002 to support falling home prices triggered by the financial crisis of 1998.

The figures are equally astounding at the top end of the market. A home on Victoria Peak, an exclusive neighbourhood with only 500 houses, might sell for as much as £6,500 a square foot. That is more than double the price for a comparable property in Mayfair or Knightsbridge in London. However, soaring prices for luxury homes does not mean that Hong Kong’s economy has escaped the recession, with unemployment at 5.4 percent and retail sales declining in turn.

The rising rents and surging house prices are causing many people struggling to find a home to turn towards a shady trend for converting older industrial and commercial buildings into lofts for residential living.

Lofts are the latest big thing and are often created without formal approval in old or disused industrial and office buildings, but they appeal because they tend to have high ceilings and prices well below market rates. While a standard HK$500 per square foot apartment in Hong Kong might set you back HK$4m, you could get around double that in the unofficial loft market.

But although these kinds of properties might be seen as bargains by buyers and tenants, they inevitably end up with a distinctly unfashionable address in rather run down neighbourhoods and also run the risk of breaching government regulations. Long term use does not necessarily lead to lawful use in this case. The legality of such conversions would depend on whether the building was zoned for residential use or whether structural changes have been carried out, in which case Buildings Department approval would be required. However, the internal changes to the building may only come to light if the owner decides to sell. So a converted building could be rented for years as residential use without the authorities knowing about the situation.

Despite this fact many people, especially young professionals, do not seem to be fazed by such risks and are rapidly making use of otherwise empty buildings around the city. Perhaps this black market may in time start to influence Hong Kong’s legislative bodies to rethink their current model of redevelopment, and a new path for regeneration will be created by retaining Hong Kong’s distinctive urban fabric.

Hamish Herford is the director of Hogarth Architects. He is currently designing two holiday resorts in Kenya, a yoga spa resort in the Sri Lankan mountains and will soon start work on a private house in St. John’s Wood.