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How to Buy and Sell Property in a downturn

‘‘A drop in prices may still leave you sitting on decent property gains, depending on when you bought, and with interest rates so low it is tempting to sit out the slump’’

The bulls have turned into bears in a hurry in Hong Kong. Thanks to the dramatic selloffs in the world’s stock markets, and the likelihood of a recession in the world’s biggest economies, property experts say they now expect Hong Kong real estate to take a big hit.

It’s amazing how quickly and severely sentiment has turned. People who were forecasting decent growth in property prices for the year are now expecting them to plummet. No one is ready to predict when the market will bottom.

When it comes to property, Hong Kong “is actually a city of paranoids,” says Nicole Wong, the Head of Hong Kong and China Property Research at CLSA Asia-Pacific Markets.

But as the joke goes, you’re not paranoid if they’re all out to get you. CLSA was in May predicting residential prices would rise 20 percent for the whole of 2008, building on their 10 percent rise in the first two months of the year. But when the investment bank updated its outlook for its annual conference at the end of September, it predicted instead that prices would slump 20 percent to 30 percent.

You can’t blame homeowners and speculators for running scared, particularly if they were punished by the 65 percent decline in property prices after the Asian financial crisis 10 years ago. Now homeowners are desperate to avoid a similar fallout from this US financial crisis.

Wong notes that family friends in their 60s have been calling her, concerned about home prices and asking whether they should sell the flat that they live in. Such anecdotal evidence shows how negative the sentiment has turned in the city.

“People got burned and got their assets wiped out not so long ago,” adds Wong. “A lot of people are quite fixated by the tight supply [in Hong Kong property]. But demand is the key moving part, and demand is going to contract quite sharply.”

Aaron Fischer, the Head of Property Research at CLSA, says both he and Wong are looking to offload any investment properties they own in Hong Kong. “We’ve got a time of lost confidence - the outlook is pretty shabby.”

So what is the best way for property owners (or seekers) to survive the downturn? First of all, it’s useful to get a little perspective. A drop in prices may still leave you sitting on decent property gains, depending on when you bought, and with interest rates so low it is tempting to sit out the slump.

“The 20 percent decline we are expecting puts prices back to where they were mid-way through last year,” notes Fischer.

CLSA suggests that luxury property, which had the biggest run up in recent years, will suffer more than mass-market apartments. Luxury housing values in Hong Kong may come off 30 percent, whereas mainstream property is likely to fall around 20 percent.

The declines in luxury property are probably a good thing since the market was getting ahead of itself - luxury property, at an average of HK$11,500 per square foot, was, according to CLSA, commanding a premium of 179 percent over mass-market apartments, averaging around HK$4,000. That is an even bigger gap than the 119 percent premium luxury property was commanding in 1997.

There should also be some welcome news for tenants. Brokers suggest they may want to use this downturn to negotiate new leases.

Victoria Allan, the Managing Director of the brokerage Habitat Property, believes rents will fall quite a bit faster than prices. She estimates they have already fallen 10 percent to 15 percent, with landlords much more willing to negotiate and to throw in perks such as renovation expenses, and will fall another 30 percent to 40 percent by March 2009.

“Hong Kong rents doubled in the last two years - they were ludicrously high,” says Allan. “Hong Kong was pricing itself out of the market for business.”

Landlords that saw properties stand empty after the 1997 crash have been much more proactive this time around, brokers say. Suddenly buildings in Repulse Bay that always have six-month waiting lists have flats available. Owners are doing what they can to make sure their apartments stay occupied.

People looking to buy or sell will have harder decisions to make. Knowing the Hong Kong property market can be very volatile, many buyers have been waiting for a fall in prices before looking to buy. But brokers suggest they need to tread carefully.

“Investors and speculators have obviously just gone from the market,” Allan says. “But people will also take the view that they see value back on the market. The people who are buying at the moment and over the next 18 months will either be owner-occupiers who missed out on SARS, or people who bought in SARS, then sold, and have been holding on to the cash waiting for the market to go back down.”

Affordability levels are still good in Hong Kong, and interest rates - though rising - are still low. That suggests there won’t be many owners who are forced to sell, and not that many ‘distressed’ properties coming on the market.

As a result, buyers will have their pick of properties to look at but may not find the amazing deals they expect. Sellers will find it very hard to find a buyer and may be forced to cut their price significantly to get a deal to go through. Some potential sellers are shifting and looking to rent their apartments instead, until listingsbuying sentiment improves.

“If you are a vendor it is hard,” Allan says. “If you can, it is obviously better to sit it out and just wait. If you need to sell, it is better to drop your price and sell sooner rather than later, probably. The only way you’re going to transact is if the vendor will take a very aggressive cut,” she adds.

With the financial crisis still working its way through the markets - in October, Asia’s biggest market, Japan, seemed to have made a point of rising or falling by 10 percent or more in a day - no one is ready to call when the crisis will end.

Hong Kong could be set for a lurch downwards in property prices, followed by a long period of sideways moves or gradual declines. Only when confidence in the economy returns is any kind of rebound likely.

Now is not the time to be snapping up properties looking to flip them or make a quick buck, market watchers suggest. But people who are buying properties for their own use may get a deal that looks good a few years down the line.

“Are you buying at the bottom? Probably not right now,” concludes Allan. “But if you are an owner occupier and looking to buy for five or 10 years it still makes sense.”

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