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These articles below can also be found in the 15 - 30 April 2008 issue of Square Foot magazine:

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Working it

Buying property for investment purposes has its own set of rules. Alex Frew McMillan looks into playing Hong Kong Monopoly – for real

Last year’s wealth effect in the stock market has fast turned into a poverty effect. But if you were prescient or lucky enough to take your money off the stock table late last year, you could be sitting on sizeable gains.

Extremely low interest rates and Hong Kong’s fast-dwindling currency may persuade people to plug it into the property market instead. In Hong Kong’s edition of Monopoly, a lot of punters like to dispense with the board and the pretend money, and play for real.

Would-be moguls ought to pick the hat as their playing piece. They’ll need to wear a different one when making their selections. They would also do well to remember that buying property strictly for investment requires a different mindset from buying property for self use.

It’s a little harder to determine what you are looking for in an investment property – you’re not just thinking of whether you like a property personally, and what you’ll do to renovate it. Now you’re thinking about possible tenants, the resale value, and rental yields. This can put people off, but it shouldn’t.

Managing your investment

Property investors should likely stick to property stocks in the stock market if they want a simple, effort-free process. Although investors may want to put down their money and forget about the property, that’s not always possible.

“The biggest difference between buying for investment and self-use is that you have to get more involved in the [investment] property,” Chris Dillon says. “That means thinking about its desirability from a rental perspective, interviewing and negotiating with tenants, and answering phone calls in the middle of the night when the drains overflow.”

Dillon, who runs his own public-relations agency, Dillon Communications, also recently put out a book, Landed, or The expatriate’s guide to buying and renovating property in Hong Kong. It outlines his experiences both as an investor and an end user.

He notes that unless you are buying a number of properties to manage, it is simpler to do the work yourself rather than try to outsource it.

“Some things, like basic maintenance and repairs, you can farm out to a trusted contractor,” Dillon says. “The business aspects, however, are best managed by you.”

Making the right choice

At the same time, people buying property for investment need to distance themselves from the sale somewhat. Many people won’t buy an investment property unless they would live in it themselves, but that can be a mistake, because it can mean opportunities are overlooked.

John Au-yeung, a property broker with the agency Fidelity Realty, says you shouldn’t forget why you are entering the deal.

“Like stocks, the investment property is only an investment vehicle,” Au-yeung says. “One should not fall in love with the property because it is beautiful, nor should one discriminate against it because it looks ugly.”

Au-yeung notes that if you had bought a property in the Caribbean Coast in Tung Chung, which he calls “a good development in a beautiful environment with splendid view,” one year ago, you would have seen little or no gains.

But a client of Fidelity who is a professional speculator bought an ugly office in Central Mansion in Sheung Wan last August, and made a killing.

At the time, office properties in the area were selling for around HK$3,000 per square foot. The client struck a deal at HK$1,800 per square foot. Now a bidder is offering close to HK$2,400 per square foot to buy it, six months later. If the deal goes through, the speculator will earn a 33.3 percent gain.

“For investment purposes, the price is the most important factor to consider after you have made your own assessment of the market trend,” Au-yeung says. “There is always an economic cycle going on, and there is always a property cycle going on.”

At the moment, it seems plenty of investors are deciding this is the time to jump in. Property prices have skyrocketed in SoHo and the Mid-Levels as investors take old properties, renovate them and flog them on.

The practice is becoming increasingly popular in Hong Kong and has been imported from overseas, particularly Australia and Britain, where it sometimes seems every other show on TV is about property makeovers.

“Usually the people who buy these flats are the wives of professional expats who have left their profession back home, and treat it as a hobby,” says Caroline Ergetie, the Swedish-born director of the brokerage House Hunters.

Now the trend seems to be spilling over from Mid-Levels into neighbourhoods to the west. Sheung Wan, Sai Ying Pun and Kennedy Town have all seen more interest from speculators and renovators, agents say.

Some investors build up big portfolios. Others hold one or two properties and see them almost as a game.

“There are people who have got up to 20 apartments in their personal portfolio,” Ergetie notes. “Then you have people who have one or two flats, and it’s an achievement in doing it up and renting it out.”

Predicting market trends

Besides price, investors need to decide where in the cycle they are. Hong Kong has a very volatile property market, and it certainly doesn’t just keep going up. So speculators and investors can get burnt if they call it wrong.

“For the economy and for the investment market, what goes up must come down,” Au-yeung says. “I have to say that property prices in Hong Kong will come down, but I do not know when or by how much.”

The city is still on an upward trend for now. But the looming and very serious problems in international credit markets may make themselves felt sooner rather than later.

“The trouble is, economic or business adjustments never hit right on target,” Au-yeung says. “They always overshoot before readjusting in the opposite direction.”

With wages still rising and Hong Kong’s pegged currency still falling, the city is starting to see greater inflation. That’s compounded by China’s rapid growth and rising costs for everything Hong Kong imports from China, particularly food.

Real estate is a favourite investment in times of high inflation, since property prices rise along with it. So it is likely to continue drawing cash while that trend escalates, particularly when other types of investment don’t look all that attractive.

There is also a real herd instinct in Hong Kong. Once the market gets going, it takes some stopping. The same applied when it went into reverse – it took the better part of a decade for the market to work its way out of the problems left when the 1997 property bubble burst.

“It is very difficult for anybody to predict how exactly the market will go,” Au-yeung says. “What you can do is decide whether you can afford to take the risk in this game.”

Good investing doesn’t just require buying at the right price. It also requires selling at the right price. So once you have got in, it makes sense to make a plan to get out.

“A good investor should always be determined enough to sell immediately, even at a discount, when he detects the reversion of the upward cycle,” Au-yeung says. “Very often, there is enough time for the smart investors to escape at the beginning of the downturn.”