Fasten Your Seat-belts

March 18, 2008

Last week the US Federal Reserve pumped US$200 billion into the banking system in an effort to bail out some of the cash-strapped banks and to relieve the tightening credit stemming from the worst property market slump in the US in decades. The aftermath of the property slump begins to surface and is making deep repercussions in other economic sectors.

Coupled with this but doing the reverse is the Chinese government, who at last week’s National Congress vowed to continue the dampening measures in order to rein in high inflation and overheated economy. The mainland stock markets remained in the doldrums amid disappointment that the government would not do anything to salvage them.

However. the two contrasting scenes have the same impact on Hong Kong, especially its luxury property market which has benefited in the last nine months from overspill of the buoyant stock markets in Hong Kong, China and the US. Many buyers of luxury properties in the last quarter of 2007 were investors who made good fortunes in the stock market. The iron hot stock market helped fuel demand for alternative investment in real estate, which saw prices rocketed to new highs amid a sudden surge of activities. Now that local stock market has lost one third of its peak value and major counterparts in China and the US have fared no better, the chase for cash has begun. The collapse of an investment fund at Carlyle Group (one of US’s largest private equity investors) and Bear Stern (a major US investment bank), sent shock waves across the Pacific Ocean to Hong Kong. Equity and property investors are jittering with fright. More sales listings emerged in the last two weeks. Luxury property sales are sluggish and price softening in the tone of 3% to 5% is already seen in some areas. As more people choose to sell, we expect the fat profit margin they have seen accumulated on their properties is beginning to thin down.

Buyers today are extremely cautious, fearing that a move too early will eventually result in unnecessary pressure when the price slides. We have witnessed that a large proportion of luxury property buyers in the last nine months are equity investors who took profit out of the stock market. Some of them are investment bankers and fund managers who made fortunes out of their own equity investments and employment bonuses. These people, unlike traditional property investors, tend to trade in properties much quicker and are usually ready to exit even if that means taking a loss. The presence of this kind of sellers would usually speed up the price adjustment. So it would not be surprising to see luxury property price taking a nosedive before hitting a new level of resistance. With uncertainties of the US financial fallout still lingering and that there are no signs the Chinese government will stop cooling the economy any time soon, property investors should brace for a rough ride ahead. Fasten your seat-belts!

By K. S. Koh