Low-yield prime property
July 05, 2011 - Hong Kong
Currently there are many reasons to invest in the Hong Kong property market: interest rates are low, liquidity is ample, foreign demand especially from mainland China is high, the economy is strong and benefiting from China, housing completion numbers are falling short of medium-term demand, and investors are seeking the protection of fixed assets against higher inflation. It seems that there are no reasons not to invest in property. However, the positive sentiments have been pushing up the price for so long that we start to wonder when it is going to stop.
Make no mistake, we are not projecting a crash in the property markets. Although the government has recently started to take action to cool the market, the market's overall condition is healthier than in 1997. The total loan to deposit ratio is half of what it was in 1997, and the loan to value ratio is at a 10-year low. Furthermore, property is not as leveraged as it was. However, from a risk / return point of view, property is no longer so attractive.
The common belief on property investment depends on three things: location, location and location. It invites people to jump to the conclusion that it is always best to invest in prime locations in city centres where scope for expansion is finite, simply because these are the 'best' locations. If we take a more macro approach, the three "locations" can be construed to mean that investors should first consider which country is suitable as an investment destination, second which city has favourable prospects, and third what property is suitable in that city. Hong Kong, as an investment destination, is running behind other Asian countries like Singapore. As a favourable prospect, it relies on mainland China so much that it cannot sustain its growth. EDITOR'S NOTE: THAT'S A HUGE ASSUMPTION WITH NO BACK-UP IN THIS ARTICLE AT ALL!!!!!!As to what property is suitable in the city, the Hong Kong property market has been twisted so much in the past that the current quality of housing is simply poor.
Assuming that vacancy risks and above all tenant solvency risks are particularly low in the expensive locations, the yield on prime real estate is justifiable. However, from a technical point of view, if current prices reflect the discounted future yield potential of the market, then they seem over-priced.
Income levels have not improved much since the Asian financial crisis, and the property market is turning into an unachievable luxury. While many mainland Chinese consider Hong Kong to be still attractive, other foreign investors simply find Hong Kong an unsatisfactory place to live. If the mainland Chinese were to experience a broader property market, the sentiment might eventually change.
blog, property, interest rates, investment