HK needs to set up an index to guide investors

Hong Kong should build an investment index for commercial properties, similar to those in most other major economies, to provide a benchmark against which to measure the returns on portfolios, according to Nicholas Brooke, chairman of Investment Property Databank Asian advisory board. An index also sent a signal to the world about the way a market conducted itself, he added.

'Without an index, it is impossible for anyone to say exactly how well the property market has performed at different times; when the peaks and troughs of the cycle occurred; how volatile [or risky] the market is; how property investments compare with stocks and bonds; and how Hong Kong property compares with other markets,' Brooke, who is also chairman of real estate consultancy, Professional Property Services, said.

He agreed that some aspects of Hong Kong's property market were transparent, and a lot of useful information about purchases and lettings was available from the Land Registry.

'But transparency is not just about the availability of information. It is also about presenting information in a way that allows meaningful comparison, and that is what a robust index, constructed to an internationally recognised standard, would allow,' he said.

One measure of returns available in the market was provided by international property performance measurement company, Investment Property Databank (IPD), which collected information on real estate investment assets held in property companies, Reits and private-equity funds across Asia.

Last week, the IPD released a summary of its findings, which showed that based on property investments valued at nearly HK$ 1.9 trillion, the average return for the nine key markets in the study was 8.4 per cent last year, and 6.2 per cent a year over the past five years.

'This immediately tells a compelling story of Asia's strength relative to other parts of the world, as IPD's equivalent five-year figure for direct property in the US was just 2.3 per cent per annum and the annual average for Europe was 3.5 per cent.'

The returns were calculated from property assets in each case that was studied, taking into account rent paid by tenants, the amount spent in maintaining properties, and the change in building values.

'As such the returns should not be confused with the returns an investor gets from a Reit or property company, which are based on share price; or the return from a private fund, which might include the impact of debt as well as the property,' Brooke said.

Another piece of evidence to emerge from the study is the role of China in driving the region's economies, with the figures showing the top three markets last year influenced by the world's second-largest economy, namely Hong Kong, Taiwan and the mainland.

'The numbers also tell a characteristic story about Hong Kong and its legendary volatility,' Brooke added. While the city emerged as the best performing market over five years, on a return of 16 per cent a year, and the best performer in each of the past three years, it was the worst performing market in 2008.

The benefit of a credible index tracking data over time was that it offered insight into the property cycle, Brooke said. 'Perhaps if we understood the cycle better, the Hong Kong market would not be so volatile.'

The IPD said its pan-Asia study did not have the same status as the indices it was able to produce for investors and managers in Europe and North America. The latest numbers for Hong Kong, it said, were based on assets worth HK$343 billion, and they included some of the city's most important commercial buildings as part of their sample.

'It is a very useful step, but there is further to go,' Brooke said. 'Not enough of the major developers and property owners are yet contributing data on their assets for the figures to be considered truly definitive, but it would not be hard for them to do so.'