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Making a killing
The local property market has suffered over the last 12 months, but distressed sales are still few and far between. Alex Frew McMillan reveals why value seekers are looking beyond Hong Kong to the major cities in Britain and the U.S.
Hong Kongers are rediscovering their appetite for risk, according to real-estate professionals, and are looking for bargains, especially overseas. Many investors, whether running a fund or simply buying property for their own use, are looking for distressed real estate and are keen to snap up deals.
“We believe in the current environment that the best plan to buy distressed deals is to buy property that is already built,” Tim Murphy, the managing director of Hong Kong-based property investment company IP Global Ltd, says. “But there’s a lot of money chasing deals.”
The idea is to look for projects where the developer has borrowed money to build but can’t complete enough sales to pay off that debt, or is seeing already-agreed sales fall through.
Murphy says that for projects completed in the last six months, developers worldwide are losing 25 percent to 30 percent of the buyers, who had already signed on the dotted line. When it comes time to complete on a deal, buyers are opting to renege instead.
In other words, a project that sold 100 apartments off-plan when it came on the market in 2006 is now finding that the buyers of 30 of the units can’t or won’t complete on them. They either can’t get the necessary mortgage, or the property is valued at a 30 percent to 40 percent discount on the purchase price, which may mean it makes more sense to walk away from the deal.
So there should be plenty of opportunity out there. According to a global housing index from Knight Frank, the worst performances for property around the world over the last year came in Dubai, where property prices for the first quarter were down 32.0 percent compared with a year ago, followed by Singapore, down 23.8 percent, the United States, off 16.9 percent, and Britain, down 16.5 percent.
“The inescapable trend is that the worst and most widespread economic recession since the 1930s continues to batter housing markets across the globe,” Nick Barnes, the head of international residential research at Knight Frank, writes in the report. “Rising unemployment and concern among those still in jobs, added to constrained credit conditions, mean that buyer demand for housing remains suppressed, and confidence is low in most markets, which is inevitably having a negative impact on house prices.”
Hong Kong fared only slightly better than the world’s worst markets, down 15.7 percent in a year. But prices did at least turn around and show gains of 1.6 percent in the first three months of the year, meaning Hong Kong was one of the worst performers of 2008 but one of the best performers at the start of 2009. The one-year drop in prices was particularly dramatic compared with a year ago because there was a lot of activity in the Hong Kong market at the start of 2008.
Local homeowners who can afford to hold on to their properties can simply sit and wait for a rebound. So although the property-price declines may be eye-popping, bargain hunters may also find there are fewer properties on the market than normal.
“There is sporadic evidence of buyers snapping up relative bargains,” Barnes writes, “but some buyers are still hesitant and waiting for clear signs of recovery. Moreover, in a falling market, sellers are usually forced to a greater or lesser extent, which means that opportunities to buy are greatly reduced and transaction volumes correspondingly low.”
Market watchers say there are few signs of distress in Hong Kong, where borrowing policies from banks have always been fairly strict, and the memory of the Asian financial crisis is fresh. Most investors seeking ‘distress’ are looking for purchases in countries such as Britain and the United States.
“We believe now is a good time to buy U.K. property,” Murphy says. “There is a lack of supply of quality built property, and you’re getting a 20 percent to 35 percent discount now compared to a year ago.”
It is also relatively cheap to borrow in Hong Kong, Britain and the United States since interest rates are relatively low. But the poorly backed buyers who prompted the sub-prime meltdown are now shut out – prospective property purchasers will need to put down a deposit of 30 percent to 35 percent, and be able to demonstrate the income necessary to pay off a loan.
“If you don’t have any money, you can’t buy property, which is a good thing,” Murphy says.
In a down market, it is particularly essential to identify the right areas to buy, even if you are hunting for distressed real estate. Capital cities and city centres are likely to retain their popularity, but suburban or rural markets may take years to recover.
In Britain, “I wouldn’t be investing outside of London”, Murphy says. “In central London, you still have marginal undersupply because it is very difficult to build property.”
Murphy recently unveiled a new project that he calls Pegaso, selling 56 apartments around a courtyard in Hoxton, northeast of central London. The area, next to Shoreditch, has become increasingly trendy, with the development sitting opposite Jamie Oliver’s restaurant Fifteen.
IP Global bought the property off a distressed Spanish developer. But it had to look long and hard before it found somewhere it liked and was outbid on several deals by other investors chasing distressed property. “We looked at 57 properties in the last two months, and we did one deal,” Murphy says.
Other major U.K. cities such as Birmingham, Manchester, Liverpool and Leeds have seen building booms, and prices ran up massively during the bull market for property over the last two decades. But that makes them risky places to invest.
Likewise, investors in the U.S. feel opportunities are best in the largest cities, such as Los Angeles and New York, but they are picking carefully after that.
“Florida is in a very big hole,” Murphy notes. “You can buy an apartment for US$60,000 (HK$465,113) that cost US$200,000 a year ago. But are you going to rent it?”
According to ‘The Future of Residential Development’, a report from Knight Frank that looks at the future of British real estate, land values have fallen by as much as 70 percent in some parts of Britain, and falls of 30 percent to 50 percent are common. The drastic declines suggest some major changes may be under way. For instance, since it will take new developments longer to turn a profit, there may be more of a focus on quality, the company concludes.
“Sales have ground to a halt. Prices have been slashed and many house builders are battling to survive,” Jon Neale, the head of development research at Knight Frank, writes in ‘The Future of Residential Development’. “Those who do are likely to be very critical of the way their businesses were run before this crisis. There will be a period of reflection and change in the industry as whole.”
But the bargain seekers still say this is a good time to be sniffing around. “I’m not sitting here saying we are at the bottom,” Murphy says. “I am saying I’m buying at a big discount. Will it go down another 10 percent? I don’t know.”
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