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Where do we go from here?
Alex Frew McMillan looks back at a turbulent year for the global property market, and provides his forecast for 2009
"Hong Kong is blessed by its proximity to the economic powerhouse of Asia: China. Even if China slows to 7.25 percent or 7.5 percent growth, as some economists predict, that is still likely to remain the best rate in Asia"
2008 was the year the wheels fell off the vehicle that had been driving consumer growth around the world - rising house prices. As we approach the end of the year, there almost isn’t a market around the world that hasn’t been hit by the property slump. The Middle East was the last region to fall, but even in Dubai, real estate agents have started to get nervous as prices turn down.
Hong Kong has fared better than many markets. According to a Knight Frank study, prices in the third quarter were down 2.5 percent off the market’s peak, but still up 18.0 percent compared with the same time last year. That ranked the city seventh globally, behind Dubai, Slovakia, Russia, Bulgaria, the Czech Republic, the Ukraine and Jersey, and just ahead of the Philippines, the only other Asian nation near the top. China ranks thirteenth, with 5.8 percent growth over the third quarter of 2007.
Globally, the survey showed the first ever worldwide fall in real estate, with average prices falling 0.3 percent. One-third of the countries ranked are showing annual price drops, sign of more prolonged problems.
The biggest falls came in Latvia, the United States, Estonia, the United Kingdom, Denmark, Ireland, Austria, New Zealand, Portugal and Germany. Declines of 5 percent in just three months were not uncommon. US prices, where of course the subprime problem started, are now off almost 21 percent from their peak.
In retrospect, we all now know that the property market’s strong gains in the United States were unsustainable, particularly when coupled with irresponsible lending practices. The laws of gravity - what goes up, must come down - do indeed apply in real estate after all.
“With the benefit of hindsight, there was a phenomenal bubble in house prices in the US that we are now seeing start to unwind,” says Glenn Maguire, the Chief Economist for Asia at Société Générale.
In some of the ‘sand states’ such as California and Nevada, house prices increased from 1 times income to about 10 times income. Overall in the US, in the space of six years, house prices doubled relative to disposable income. Those trends aren’t based on real-world growth and can’t continue for ever.
But Asia in general, and Hong Kong in particular, appear to be better positioned to weather this downturn, because our previous slumps, during the Asian financial crisis of 1997-98 and SARS in 2003, are comparatively recent history, and both borrowers and lenders learned a lot of painful lessons at those times.
“In Asia, you don’t see the same leveraged ownership and forced selling as you do in the US or Europe, so you are not going to see prices fall as much,” Maguire says. “Demographics are also a positive in Asia – we continue to have rapid growth in income formation, particularly in India and China.”
The headlines in Hong Kong are focusing on two words that haunted the city for years: negative equity. There were 2,568 mortgages that were underwater at the end of September, up from 936 in June, according to figures from the Hong Kong Monetary Authority. The total value of those troubled loans rose from HK$1.7 billion to HK$6.0 billion.
So are the bad times here again? For those 2,500 borrowers, yes. But that is a small fraction of the housing stock, and a far cry from the peak of the slump in June 2003, when 106,000 borrowers were in negative equity, meaning they owed more on their home than it was worth - even if they sold it, they would have to pay back the bank extra cash.
Property experts admit that they don’t know how long the slump will last. Most are not yet ready to call a bottom, and they aren’t sure when markets will pick back up.
The gutsy (or the crazy) ones are getting ready to buy back in. But even they are keener to raise money right now rather than put it to work.
Hong Kong is blessed by its proximity to the economic powerhouse of Asia: China. Even if China slows to 7.25 percent or 7.5 percent growth, as some economists predict, that is still likely to remain the best rate in Asia. Rapid urbanisation and the emergence of a middle class underpin the growth and suggest demand for housing will continue to grow.
China in 2007 overtook the United States as the greatest contributor to global growth. Although its economy is still four times smaller than the United States, China has been growing at an average annual 11 percent rate from 2005 through 2009, according to Asian Development Bank projections.
Of the 540 investor groups attending the MIPIM Asia Conference here in Hong Kong in mid-November, many identified China as one of their primary focuses.
“I think 2009 will be a good time to start looking,” says Gaw Capital Partners Co-Founder Goodwin Gaw. “2009 and early 2010 could be a sweet spot.”
His company, Gaw Capital, is looking to raise up to US$1.5 billion in new capital, to supplement the US$1 billion it has already raised. Together with debt, it manages US$4.7 billion in 14 projects across China.
But Gaw is buying whole shopping centres, office buildings, multi-use projects - the company opened its first hotel, Hotel G, in Beijing after the Olympics. Individual buyers can and should be much more cautious - many live in the properties that they buy, and even their investment properties are big decisions for them and small in scale for the investment funds.
At MIPIM, Richard van den Berg, the Country Manager for Greater China at ING Real Estate Investment Management, advised one prospective buyer to sit on her money. Although she was looking for a place to purchase in Hong Kong, he recommended that she put the money in a time deposit or some other vehicle where it is locked up for 12 months, then revisit.
Even van den Berg’s own company, which is raising a US$750 million fund to invest in China, is going to wait before it invests that cash. “My feeling is there is nothing to win buying now,” he adds. “Get the money ready in Hong Kong and then sit on it.”
China’s property markets have suffered through a savage 2008, hurt by 18 months worth of austerity measures from the mainland government that finally started to kick in around February. Property prices have fallen 30 percent in Guangzhou and 25 percent to 30 percent in Shenzhen,
“Those markets went higher, but turning off lending has a bigger impact, so they will suffer greater,” notes Nicholas Brooke, the Chairman of Professional Property Services.
There are signs that the Chinese government has now gone into reverse and is looking to drive the property market back up. Interest rates have been slashed, for instance, and it is gradually getting easier to borrow again. Homebuyers can get a mortgage of 80 percent of a property’s value, at 70 percent of the People’s Bank of China published rate, the equivalent of the prime rate.
But observers such as Brooke believe the state would still like to see property prices fall a similar amount again, particularly in the south. The government says its main intention now is to promote affordable housing, so there is likely to be little support for luxury property on the mainland.
Then again, China was taken aback by the sudden slowdown in other parts of the world.
“We don’t see them taking the breaks off completely because they still want to encourage affordability,” Brooke says. “They had a nice Chinese way of managing things. But then they get the financial crisis on top of it. That has rather thrown out their planning.”
Hong Kong’s fundamentals are healthy, most pundits agree, but there is a big question mark hanging over the city in that no one knows what a globally coordinated recession would mean, or what the bailout packages will produce. Sentiment is unlikely to pick back up until there are signs of solid recovery - people here are worried about what is going on over there.
“Hong Kong is driven largely by sentiment as opposed to fundamentals,” Andrew Weir, who runs the property and infrastructure practice for KPMG in Hong Kong, says.
Weir says he is reasonably bullish about property in Asia in the long run. But he, like many market watchers, anticipates further falls before the market turns around. He forecasts that luxury property will fall 20 percent to 30 percent, and commercial property prices will fall 15 percent, a technical recession - but not a crash.
But why try and call the absolute bottom of the market? Many property watchers suggest you just wait until it has turned for sure.
“Entering the housing market and equity market at the moment is like trying to catch a falling knife,” Maguire says. “Why try and grab it? You want to wait for it to hit the ground and do that little wobble before you pick it up.”
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