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The heat is on
Summertime… and the market is going crazy. Alex Frew McMillan asks is the rebound for real?
En route from one meeting to another in Central the other day, I passed a prominent institutional real-estate fund manager 0n the street. He was heading in the other direction, also no doubt from one engagement to the next. Full disclosure – I was feeling flush, carrying a 10 percent deposit cheque in my breast pocket, because my wife and I had just sold our apartment in Pokfulam. I was walking from my lawyer’s office, where we had just signed the full Sales & Purchase agreement – and I told the fund manager as much.
“Probably a wise move,” he said with a smile. “If there ever was a summer to ‘Sell in May and go away’, this is it.”
Interesting advice. Real-estate professionals seem divided on whether the rebound in the property market, like the rebound in stocks, can be sustained. There’s been strong growth since the market lows in March. Many now expect a bit of a lull.
It’s a bit of a tradition for stocks. The rule on Wall Street used to be that when the money moved to the Hamptons, you might as well get out of town, and the market, too. The City of London would set off for the South of France. Hong Kongers would book flights to Tokyo, Thailand and Bali, while many expats would head home.
But as you may have noticed, the worlds of high finance and real estate have gone through some changes. And at least into July, the strong sales momentum and rally in stocks were being sustained. Property agents, lawyers, mortgage bankers and contractors all say they’ve seen a pick-up in business.
Is the rebound for real? That remains to be seen. But the money men probably won’t switch off their Blackberries this summer when there’s hard cash to be made.
In Hong Kong, the man on the street, who may of course be carrying a 10 percent deposit cheque in his pocket, has also got his confidence back. The J.P. Morgan Investor Confidence Index, designed to measure the outlook of retail investors on the local market over the next six months, rebounded strongly in June from its lowest level in the first quarter.
The Hang Seng hit a low in March, then raced up. And so did Hong Kong’s property market – without any of the usual six- to nine-month lag. Property and stocks in Hong Kong surged at the same time.
“Thanks to the plentiful liquidity and growing optimism in the marketplace, the number of sales transactions in the Hong Kong residential market remained active”, into the first half of July, the most recent residential snapshot from the property brokerage Colliers International, states. June residential sales hit 15,747, up 20.5 percent over May and 95.2 percent higher than the 12-month moving average.
Mainland buyers have also become very active locally, though it is hard to track exactly how active, because they often buy through local relatives or offshore companies. At big, brand-name developments such as The Cullinan, the Sun Hung Kai Properties’ development in West Kowloon, as many as 60 percent of the buyers are thought to be mainland Chinese. Bel-Air in Cyberport has also proven very popular.
“What we do know anecdotally is that mainlanders have been quite active,” says Simon Smith, the head of research and consultancy at the brokerage Savills. “Loan growth to mainlanders has spiked quite considerably.”
Although some China watchers say they are now worried the mainland government will clamp down on the Chinese property market again, due to fears over inflation, problems in the West may encourage them to wait and see.
“I don’t think inflation is keeping anyone awake at night at the moment,” Smith says. “I don’t think it will resurface until after next year at the earliest.”
Now back to my 10 percent deposit cheque. I don’t normally like writing about my own experiences and prefer interviewing property experts for my stories. But my wife and I have noticed the pickup very directly, by virtue of having our property up for sale. So I’ll tell a little of our tale.
Our Pokfulam apartment, purchased in late 2004 at a time when the Hong Kong property market was racing up from its SARS-induced lows the year before, went up for sale last summer, shortly before Lehman Brothers went bust.
When we put the apartment on the market, the financial crisis was already well under way – the first signs of trouble at Bear Stearns started way back in June 2007. Our decision to sell, driven by the addition of a second child to our family and the need to upgrade to a bigger apartment, was a classic case of bad timing.
Hong Kong property prices trickled slowly south for most of 2008, with only a small decline. Most people thought the market was crashing before it did. But the bottom truly fell out in the last three months of last year.
Thus, there was virtually no buyer interest in Hong Kong – the number of agents knocking on our doors could be counted on one hand, without using any fingers – and there was even less interest among the banks to lend to anyone.
But this spring, something changed. I chalk it up to HSBC’s rights issue, which went off very successfully and yielded some very nice gains for anyone who participated. Many investors in Hong Kong did. Despite a hairy period when it looked like the rights would be worthless, they ended up being a very good play indeed. From that moment, the knocks on our door started sounding again.
We agreed a deal in mid-June, selling our three-bedroom apartment to a buyer in Toronto for HK$9.5 million, a profit of just over 50 percent from the HK$6.15 million purchase price that we paid in 2004. We didn’t get the market highs, but we certainly did all right.
We aren’t going away. I like Hong Kong in the summer – you can get a taxi and a restaurant reservation, and the beaches are great – we are moving up, not out. We plan to upgrade to a 2,100-square-foot village house, buying a bigger place in a relatively depressed market, although it has picked up – a bit like when we bought in late 2004.
Why then has the market rebounded so quickly in Hong Kong? Clearly a lot of pent-up demand and the likelihood of sustained low interest rates into 2010 has encouraged many buyers to enter the market. A lot of renters have also decided this is the lull they were waiting for before buying.
“The investors are increasingly clever, firstly, and then bank policy has a lot to do with value,” says Xavier Wong Kit-hung, a director and the head of research for greater China for Knight Frank. “Banks have a lot of cash, from deposits. So they have to find an outlet for bank lending. They are forced to loosen lending.”
There have been few distressed sellers in Hong Kong, where bank lending has been much more responsible, and memories of both the Asian financial crisis and the panic of 2003 are still fresh. So it is becoming clearer and clearer that, far from a global financial crisis, this is actually the U.S. financial crisis, or the Western financial crisis, a counterpart to what happened in this part of the world in 1997-98. North America catches swine flu, and Asia says, “So what? We went through SARS”.
Bargain hunters looking for deals here have largely been disappointed. The majority of vendors have simply opted to take properties off the market if they weren’t fetching the kind of price they wanted.
Most of the distressed sales for luxury properties have stemmed from Hong Kong owners of factories in China, who were faced with cash-flow problems in their mainland business. “They preferred to sell their property to repay the loan from the commercial bank,” Wong says, instead of being forced to sell their company in China. But even these distressed sellers had options.
Still, Hong Kong market watchers expect a quiet summer. Although some property owners and investors are worried there will be a second downturn, property professionals say this is unlikely unless another major institution like Lehman Brothers goes bust. “I think there will be a correction, but not a crash,” Wong concludes.
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