Buying Frenzy

October 22, 2009

We are all aware that the property market synchronises itself to the trends in the economy. The first nine months of this year has seen an abnormal phenomenon take place in the luxury market sector. Despite a declining economy, prices of luxury properties with sale values of at least HK$10 million, have been increasing.

KS Koh, founder and Managing Director of Landscope, tries to defragment this trend. According to him, there are four reasons. Firstly, 2008 had seen a collapse of confidence in the equities link investments causing many panicky investors to shift a substantial portion of their investment into property.

Secondly, many investors both short and long term witnessed a very phenomenal price drop of 30 % in just two months in the last quarter of 2008. This has never happened before in the history of Hong Kong not even during the disaster on the 4th of June, 1989. The immediate effect of that disaster was that it froze all activities such that no analysis could be made about the price drop. However this time market activities were ongoing and investors sensed an opportunity to buy while the prices had dropped drastically.

The third reason being that in the beginning of 2009, the Chinese government had started to pump a huge amount of capital into the economic system, amounting to almost 5 trillion now. They used a similar measure as the US & UK government – injecting a lot of capital to loosen up the credit crunch and providing the whole banking and finance system with liquidity in order to jumpstart the economy again. Nobody has the actual statistics of what was spent where. But the trickle effect means some people and companies in China who got a share of this capital had re-invested this money somewhere else – maybe some in China or elsewhere. No one knows how but some of this capital just floated to Hong Kong’s equity market and property market.

The fourth reason is that Hong Kong has always been an attractive destination for wealthy investors especially from Mainland China thanks to its good legal system, market transparency and good liquidity potential. Many of these investors could also be hoping to get a Hong Kong residency with this capital investment. Mr Koh suspects that buyers from mainland China have played a significant role in the price surge of Hong Kong’s top end properties today, which has risen almost 50 % from 2008.

Looking forward, people would be interested to see if the price surge would continue. If they will, what will be the rate of escalation? If not, what are the factors affecting the market and pulling it behind?

Mr Koh looks at it from the market fundamentals rather than from speculation. Property prices whether residential or commercial would have to depend eventually or directly on their rentals because rentals actually reflect end-users demand and hence are not speculative. So if the trend in rentals is rising then sale prices would probably go up too.

From the beginning of this year up to now, rentals have generally been declining. The rate of decline was the sharpest for the first four to five months, an effect following the aftermath of the financial collapse. However now they are stabilizing and edging up slightly to support the current sale prices.

What will happen next depends on market factors such as inflation and borrowing costs. If the rental yields after these costs have been factored in still look positive, then that will support further property investments. From the data we have today, rental income will probably outstrip cost of money and gives us a positive sign that property investments will probably keep going on. But will the sale prices go up further like what we have witnessed in the first nine months of this year? Probably not! We’re already at a level where the rental yield – a factor between the rental and the price, has dropped to a low level which has not been seen for decades.

Whether you’re taking today’s perspective or using a historical yardstick, we are working for a very low yield level today. In Mr Koh’s opinion it will hardly drop any further. So, that would mean that the price increase would not be very substantial unless the rentals increase and by a multiplying effect cause the sale price to rise. Most likely for the remainder of this year (last quarter), we would see rentals edging further and sale prices maintain their current level, more or less. Let’s just wait and see……..

By Jia Rangani