Historical Moment

October 5, 2008

September 2008 will be remembered by the world as the most dramatic month in financial history. Lehman Brothers. the fourth largest investment bank in the US. collapsed amid the historical credit crisis; Merryll Lynch was sold to Bank of America as other salvation plans failed; AIG. one of the world's largest financial groups. went into deep trouble and was only saved of its immediate closure by US government's injection of US$85 billion; Wachovia Bank was in negotiation to be sold and more than a dozen US banks closed down since the subprime woes surfaced. Even the survivors Morgan Stanley and Goldman Sachs had to change its business model to the traditional commercial banking. In Europe. Fortis Group had to be saved by the Belgian government. Hypo Real Estate was calling for German government's bailout. and many other European governments had to dig deep into their reserve to salvage falling financial institutions. In UK. troubled mortgage lender Bradford & Bingley had to be nationalised to avoid closing down after UK government rushed to save Northern Rock a few month earlier.

The troubles in the financial industry had serious repercussions for other sectors of the world economy. The interbank lending was in chaos after credit crunch hit historical number of banks worldwide. Many central banks had to intervene and inject capital to ease the tight borrowing environment. Hong Kong Monetary Authority has announced 5-point policy as pre-emptive measures in view of the worsening capital market. The current turmoil has no sign of abating. despite the US government's US$700 billion rescue plan.

In Hong Kong. the property market is hard hit by this financial tsunami. with the luxury sector bearing the brunt. Layoffs in the financial sector have greatly diminished the demand from this affluent community. Many investment bankers who bought heavily into real estate last year are now faced with declining property price and a market that is almost at a stand still. Offloading seems to be the only option. But amid the bearish sentiment. serious buyers are nowhere to be seen. The trimming down of financial headcount means less demand for high end rental properties. Many tenants are breaking leases as their employment contracts come to an end. Property vacancy rises in the wake of all cost cutting movements. not only in the financial industry but also in other sectors which are invariably affected in the slowing down of global economy and perhaps recession.

The luxury properties on Hong Kong Island have shown a consistent sliding down in prices and rentals. and a sharp drop in transaction volume. Compared to three months ago. asking sale prices have declined by 10% to 15% in various districts and asking rentals are down 10%. Trading volume today is down 50% on June and 80% on first quarter 2008. At this point in time. we don't see any light at the end of the tunnel and are therefore unable to tell when this major correction of the market will end. But one thing is for sure the price and rental will continue to retreat as demand wanes.

By Karen Xu