Analysts confident of further real estate price rises
Despite concerns over the rampant rise in Hong Kong property prices, investors maintain an optimistic view of the real estate market.
'Hong Kong people, and Asians in general, hold a strong affiliation with buying property,' says Adrian Ngan, a property and real estate research analyst with MF Global. Ngan says many investors use property purchases as a hedge against inflation, a major concern. 'Controlling inflation is a priority for Hong Kong and the mainland, because this can lead to property bubbles forming,' he says.
Property analysts, such as Ngan, and investment specialists in the sector say there are always highs, lows and steady patches across real estate markets, which means investment in the right property at the right time could reap rewards.
Ngan says for those who adopt a wait-and-see approach to buying real estate, but still want to allocate part of their assets to the property market, there is the option of investing in property-focused equities. However, rather than invest in property development companies, Ngan favours stocks listed by companies involved in property management.
'Demand for commercial and high-end rental properties is fairly steady and these companies tend to pay quite good dividends,' he says. As an alternative, Ngan notes investors are also using yuan deposits and investment tools to mitigate the effects of inflation and accumulate assets for future property purchases.
He says that despite the government's attempts to tackle the rise in property prices and ease public concern, MF Global holds the view that Hong Kong property prices will continue to climb. 'There is a perception that interest rates will not rise too much, as a result we expect property prices to continue to increase, but maybe not at the same rate we saw last year,' he says.
As the central mainland wrestles to control the nation's overheating property market, including shutting the door on non-mainlanders buying property, and with Hong Kong and Singapore's property prices escalating, Ngan says a number of those interested in purchasing property are looking elsewhere in the region. In most cases, their attention is being drawn to Malaysia and Thailand. 'Properties in Thailand tend to be cheaper but for a reason; there is still political uncertainty,' he says.
He notes that while properties in Europe, particularly Britain, seem attractively priced, Hong Kong investors are not convinced the economy is recovering sufficiently quickly to make the investment seem attractive. 'My personal view is this would be an ideal time to investigate the market but, generally, Hong Kong investors are still hesitant,' Ngan says.
Manpreet Gill, Asia strategist at Barclays Wealth, says in addition to buying bricks and mortar, there are ways to gain exposure to real estate investment themes. 'Listed developers and real estate investment trusts offer exposure to different investment strategies, which can be easily accessed through listed securities in most regions,' Gill says.
He says funds that focus on the real estate markets can cover investment strategy preferences ranging from stocks exposed to real estate rental or development to more complex strategies such as ownership of distressed properties in a specific location.
Gill says for those concerned about market risks and high entry costs associated with buying a single property, real estate investment trusts (REITs) provide investors with indirect exposure to real estate.
Supported by buoyant economic growth and investors' appetite for property, according to CB Richard Ellis' REITs Around Asia Report, the total market capitalisation of Asian REITs rose by nearly 47 per cent last year, to US$95 billion. However, while Singapore has been successful in attracting new REIT listings due to a supportive tax and regulatory structure, the Hong Kong REIT market has been slower to take off, partly due to limited investment opportunities and lower liquidity.
For next year, Kaven Tsang Ka-yin, assistant vice-president - analyst corporate finance at Moody's, expects mainland property developers to face a tough operating environment driven by tightening regulatory measures, rising interest rates, reduced bank lending, significant refinancing needs and increasing supply. 'We believe this will inevitably lead to slowing sales, pressure on profit margins and pressure on balance sheet liquidity for some,' Tsang says.
He says the impact on individual property developers could vary, depending on the quality of their products, the location and number of new projects to be launched. He says those in the third- and fourth-tier cities are less exposed to the tightening measures.
Tsang says in the medium term, developers may need to adjust their business models to accommodate the changing operating environment and to remain competitive in a gradual consolidation in the industry.
'We expect smaller developers and those with weak balance sheet liquidity to be the most exposed. Specifically, we consider that over the medium term, the government's priorities of maintaining social stability by controlling inflation and containing any emerging property bubble will continue to heavily influence the direction of the property market,' he says.
'Since we do not foresee a relaxation of the current regulatory trends within the next 12 months, developers' balance-sheet liquidity will likely weaken. Although they have accumulated large cash holdings from strong sales in 2010, they will experience slowing receipts of presale proceeds and sizeable cash outflows in 2011 to cover committed land payments, larger planned developments or developments under construction and maturing trust financing and bank loans.'