Bear pit traps property stocks
ANALYSTS and fund managers are advising their clients to steer clear of property stocks in the first half of 1998 as competition is expected to bite harder into the property sector.
Land Registry figures, provided by Centaline Property Agency, show the number of property transactions has dropped to levels not seen since November 1995.
Up to December 20, only 5,146 residential property transactions, worth about $17 billion, were recorded for the month. The number of transactions for all December is expected to be just 7,000.
The big developers have started dropping prices more than 20 per cent in some cases, while many have dropped prices at least 10 per cent.
Some developers have even started offering top-up mortgages in a bid to spur moribund buying sentiment.
This comes as little surprise.
It has been reported that half the units in Cheung Kong (Holdings) Maywood Court remain unsold, despite an eight-month marketing drive.
Other developers are seeing sales slow considerably, encouraging further price cuts. Some developers are bound to follow the example of their stablemates by offering even better incentives.
One developer recently offered to throw in a free car-parking space with every unit sold.
This will undoubtedly affect the earnings of developers in the coming year. The overall performance of the benchmark Hang Seng Index will be affected, as property stocks make up a large slice of its constituents.
Investors, rightly interpreting price cutting among developers as a sign that these stocks will go nowhere for the time being, will naturally look elsewhere for returns.
One sector analysts are backing is utilities. The sector generates stable earnings and offers few negative surprises. But what are the prospects for utilities, a sector which has already outperformed the overall benchmark index considerably in the second half of 1997? These shares too will soon come under pressure from profit-taking and cannot offer too much upside in the first quarter of 1998.
There are unlikely to be any big gains early next year unless a near-miracle occurs, which preludes a recovery in the regional economies.
Some market observers say one big surprise could come from the mainland, where unexpected news could shake up H shares and red chips, making these attractive once more.
Others are recommending a look at certain infrastructure plays, where earnings come in stable currencies.
The real concern analysts are pointing to is continued high interest rates.
This is what will keep the home buyers away and depress property developers' earnings.
High interest rates always keep equities from performing as well as we would like them to.
Investors probably approach 1998 with a cautious outlook towards the stock market and are likely to keep much of their cash in the bank, incurring relatively higher interest, than risk seeing it locked into equities for the next six months or more.
