Home truths for investors

PUBLISHED : Monday, 19 September, 2011, 12:00am
UPDATED : Monday, 19 September, 2011, 12:00am


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As fears of global recession mount and fixed-asset prices tumble, a growing number of overseas property developers and agents have focused on Hong Kong as a place to sell wares that are proving hard to shift in their depressed home markets.

Some of the prices on offer look distinctly attractive, and local investors often marvel at what can be bought in highly developed markets, such as Britain, compared with property prices here. Yet overseas property is a minefield for the unwary and carries the kind of liabilities that don't exist with other types of investments.

However, let's start with the positive case for those wishing to buy overseas property because the outlook for the local market is distinctly dim, despite recent strength. Barclays Capital Asia, for example, is forecasting that residential property prices could fall by as much as 30 per cent by the end of next year. This is at the high end of estimates, but even conservative forecasts are saying 15 per cent.

This is an even bigger price drop than that anticipated for most of the overseas property locations favoured by Hong Kong investors. The main reason is that these markets have already suffered far greater price falls.

In Britain, for example, the price slump has given way to relative stability, and current prices have reverted to levels not seen since 2002, according to Land Registry statistics. Further falls are anticipated next year by a number of forecasters including IHS Global Insight, which is looking at an average 5 per cent price fall by the middle of next year.

In the United States, pessimism about the entire economy is the order of the day, and property prices have continued their slide throughout the year. In some cities, such as Atlanta and Las Vegas, price levels are back to 2000 levels. Few forecasters predict any upturn next year; on the contrary, most are looking at further setbacks.

Meanwhile, closer to home in Thailand, a popular destination for Hong Kong's second-home owners and property investors, there is a considerable oversupply of new developments in places such as Bangkok. Thailand's Real Estate Information Centre is looking at a 10 per cent to 15 per cent fall in prices this year.

Therefore, a case can be made for buying opportunities for those not concerned with short-term gains, and some of these opportunities might come a good deal more quickly than profits generated in the Hong Kong market.

However, overseas property ownership comes with a host of liabilities not found in other asset investments. A lack of familiarity with foreign markets is shamelessly exploited by some overseas companies advertising in Hong Kong. The firms assert the prime locations of their properties; in reality they are nothing of the kind.

There is also much exciting talk of high yields on overseas property investments, but this tends to apply to the gross yields, which are quickly whittled away by high management and maintenance costs of a kind that do not exist in the local market.

In Britain, for example, a full management contract can easily take 15 per cent out of rentals. Landlords are expected to supply everything from kitchen knives to fancy televisions for their tenants.

Although the high charges are supposed to relieve landlords of the strain of property management, much anecdotal evidence suggests that this is not the case. The yield forecasts also ignore dry periods of non-occupancy between tenancies, which can be quite long.

Then there is currency risk - a permanent problem with overseas investments - but in other asset classes, it is far easier to buy and liquidate investments on very short notice, which is something property owners can't say.

Despite all these caveats, some of the best opportunities in overseas markets exist in commercial and industrial properties, rarely advertised in Hong Kong. They come with far fewer management responsibilities, longer tenancies and can provide much more prospects of capital growth.

Maybe a better route for those keen on property is to invest in property funds or trusts in which investments are far more flexible and there are no maintenance responsibilities.