Wednesday, June 29, 2011

Updates On HK Property Market

Despite concerns over a property bubble in Hong Kong and government efforts to cool the red-hot sector, two Hong Kong tycoons: Cheung Kong Holding’s Li Ka-Shing and Henderson Land’s Lee Shau kee have been snapping up shares in their own firms.

Robert Halili, Managing Director at Asia Insider told CNBC on Wednesday, this insider buying is encouraging news for shareholders and investors looking to bet on the real estate sector.

“The one thing I want to point out to investors is that whenever these 2 titans buy at the same time, it is almost like a solar eclipse. It only happens once in a blue moon.”

Out of the $2.6 billion dollars invested in property-related stocks over the last 10 weeks, according to Halili, Lee Shau-kee’s purchase of 39 million shares in Henderson Land accounted for $2 billion or 76 percent of the total amount.

“Prior to this year, the chairman [of Henderson Land] acquired an average of 8.5 million shares worth $309 million per year from 1993 to 2010,” he added.

So, who do you believe, the property tycoons or the more rational government officials and analysts???

Protestors are on the streets all around the world these days. In Europe people are angered by harsh austerity measures, in the Middle East they are trying to topple failed governments and on the mainland protests are invariably sparked by some form of brutality — driving over a protestor in Mongolia or pushing around a pregnant street vendor in Guangzhou. The world’s masses seem to be taking to the streets.

Except in Hong Kong, where life goes on in its disconnected-from-the-woes-of-the-rest-of-the-globe bubble, which is of course encapsulated in another bubble: the housing one. Property prices remain outlandishly high, despite signs around the world that the economic outlook isn’t exactly rosy.

The reasons are myriad, yet simple. The masses are provided with subsidised public housing. The next layer, the middle class, owns housing that is then rented out, often to foreigners whose companies enable them to discount the rent from their taxes, providing enough of a subsidy to let them rent a small flat with a maid’s room for the same price they would pay back home for a McMansion with a garden, pool and two-car garage in the suburbs of a major metropolitan area. Their landlord doesn’t need to work, but rather lives off the rental income. Then there’s the next layer — housing owned by wealthier Hong Kong families or corporations that is rented to companies that pay outlandish rents for their senior expat staff. The company writes it off as a business cost and the Hong Kong family or business laughs all the way to the bank.

The Hong Kong Monetary Authority (HKMA) has tried to keep the genie in the bottle through policy measures. On June 10, Norman Chan, the chief executive of the HKMA, announced the latest tightening measures: with immediate effect, a 50% down payment will be needed for transactions of more than HK$10 million ($1.3 million), from the previous limit of HK$12 million. Down payments of 40% are needed for homes costing between HK$7million and HK$10 million (previously the band was between HK$8 million and HK$12 million) and subject to a maximum mortgage cap of HK$5 million. A 30% down payment is still applicable for homes below HK$7 million (previously HK$8 million). The HKMA also imposed a new rule, lifting the down payment requirement by 10% for mortgage applications with principal income sourced outside Hong Kong, but of course if this is targeted at mainland buyers (more on them later) it’s meaningless, as most don’t borrow from Hong Kong banks anyway. As a result, analysts have generally viewed such tightening measures as having a limited effect.

Rating agencies such as Standard & Poor’s forecast a stable outlook for Hong Kong’s property market, though sensibly warn that the market is vulnerable to external shocks. S&P notes that the credit profiles of rated developers have a reasonable buffer thanks to that recurring rental income from a diverse population.

But it cautions about the possibility of a “sharp correction in prices”, noting in a June 14 report that “affordability has deteriorated because of high prices and could weaken further if interest rates rise from their current low levels”. The rating agency further points out that “strong liquidity could reverse because capital flows are fickle. Hong Kong is susceptible to external shocks, due to its open economy and free capital movement”.

External shocks to watch out for include “a sharp rise in interest rates, a hard landing in China’s economy, and a significant adjustment in equity markets", Christopher Lee, director corporate ratings for S&P, said in an interview.

The China connection
The recent financial crisis underscored one of the most important buyers in the Hong Kong market of late: mainland Chinese. During the crisis, Chinese investors flooded to Hong Kong, snapping up property, particularly in the high-end residential sector. And the influx continues.

According to Centaline, 24.9% of all primary transactions were by mainland buyers in the first four months of 2011, up from 24.1% in the second half of 2010. They are most active in the high-end property market, making up 38.1% of buyers in the primary market and 22% in the secondary market for transactions above HK$12 million, an increase from 33.8% and 20.8% in the second half of 2010, respectively.

That’s good for Hong Kong developers, but bad for renters or other potential buyers, who have stood on the sideline watching prices skyrocket. But a shock to China’s economic and credit conditions could trigger a correction in the high-end property market, which would then have a knock-on effect in mass-market prices, notes S&P. That shock might already be in the works. In the same report, S&P downgraded China property, pointing out worsening borrowing conditions.

If the mainland market cools and oversupply ensues, cash-strapped developers could fall into a price war to attract customers, who might then reconsider buying back home rather than in Hong Kong.

For our readers, many of whom have tried to play the Hong Kong property market by buying property here in the hopes of flipping it before leaving, it’s possible you’re sitting on — or nearing — the peak of this cycle.

“We believe the various measures that have been put up have brought a cooling effect to the secondary market, and thus transaction volume will stay low given a reduction in both supply and demand, continuing policy risks and concerns about potential asset bubbles,” explained Ken Yeung, Citi’s Hong Kong real estate analyst.

“Prices that are supported by thin transaction volumes may not be sustainable,” added S&P’s Lee.

Of course, it depends on what you own — and are trying to sell. Colliers International reasons that supply-demand imbalances and inflationary pressure continue to drive rents upwards. The average luxury rent increased 3.62% quarter-on-quarter in the first quarter of 2011 to HK$45.42 per sq ft per month, only 0.7% below the previous peak in mid-2008.

“In spite of the market consolidation in terms of sales volume during the short-to-medium run, the sustained low-interest-rate environment, rising inflation and tight luxury residential supply will drive the price growth for luxury residential further. Luxury residential property prices are forecast to grow 6% in the next 12 months,” Colliers forecast in a recent property report.

Some property specialists (particularly those who aren’t employed by companies trying to sell you property) note that the so-called supply shortage in Hong Kong is a myth. By some estimates there are as many as 200,000 empty flats in the city — certainly not a shortage that warrants price hikes. So why the high prices? Landlords are willing to sit on empty (unrented) supply.

“Prices have been sustained by the flood of liquidity and currently very low interest rates,” said Lee. “There may not be a shortage of apartments, but landlords are not renting them at below market rates. Therefore, prices are sustained by expectations of prices remaining high or continuing to grow.”

In other words, market fundamentals be damned. Given the eternal optimism of Hong Kong developers and sellers, trying to time the market is even more difficult in Hong Kong than anywhere else, and in the best of situations it is as safe a game as juggling lit firecrackers. The high could be this week, or a year from now, or five years from now. But given the global skittishness, it’s perhaps time to take a look at how much you’ve made from a property investment, and question if it’s good enough.

Bears Are Prowling

On June 10, the government announced the launch of eight sites for sale, on which it expects developers to build 6,000 flats. The move coincided with an order from the Hong Kong Monetary Authority that banks should lend no more than 50 per cent on homes valued at above HK$10 million (US$1.3 million) (down from a cap of 60 per cent).

The authority for the first time also added tougher restrictions on non-resident borrowers. Momentum is also building for the government to revive its subsidised Home Ownership Scheme, suspended in 2002. Koh said the resumption of the scheme would shorten the cycle, bringing the correction forward into the second half of this year.

“Things have certainly taken a turn for the worse,” said Lee Wee Liat, head of regional research at Samsung Securities (Asia). The government’s willingness to resume building subsidised housing for sale, together with measures targeting foreign investment demand, showed a determination to cool the market down, he noted. “A short-term correction is now possible,”

he said.

The latest data suggest a slowing in demand. Just 21 new homes were sold over last weekend — down from the 47 homes sold over the previous weekend, according to Samsung.

Secondary transaction volumes also fell to their lowest level so far this year, with just 21 flats sold at the 10 largest residential estates tracked by Midland Realty, down from 24 the previous weekend.

Developer Cheung Kong (Holdings) has lowered asking prices at its Uptown apartment block in Yuen Long by between 5 per cent and 8 per cent, putting new average selling prices in the range of HK$5,300 (US$681) to HK$5,500 (US$706) per sq ft, noted Lee in his latest research report.

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