Ask Melanie: When money isn't safe in houses
I have HK$4 million saved for the purchase of a rental property. As the housing market in Hong Kong is too hot now, I wish to defer the purchase for about six to eight months. Where should I park this money? Would reits be a good investment? I would be happy with a yield of 5 per cent.
Happiness is surely the prospect of preserving capital, making good short-term returns and swooping on ravaged assets. Luckily, most of us learn we can't have our cake and eat it. If we want a good return, we have to risk our capital, which may not be available, intact, for the next punt.
Preservation of capital and liquidity should be a priority. You are confident the property market is too hot. If that's so, do not park your money, even short term, in a real estate investment trust (reit).
The illiquid nature of reit's assets makes them only a good long-term investment. The drivers of a cooling in the housing market won't spare reit prices - increased reit borrowing costs, downturns in business sentiment, leases renegotiated at lower rentals and falls in dividend payments will all show up in the share price. Even the most defensive reits are not immune - Link Reit fell 19 per cent in three months in 2008.
Dividends of 5 per cent to 6 per cent per annum (commonly seen among Hong Kong's listed reits) could add HK$100,000 to HK$133,000, minus investment costs, to your HK$4 million in the next six to eight months. But I caution you to think how unhappy you'll be if you're scalded.
So what's a good alternative?
I went mystery shopping at the major retail banks. (Private banks need US$1 million to say hello.)
Australian banks are a good bet. The safest Aussie banks pays 1.14 per cent per annum for a six-month Hong Kong dollar term deposit.
But the highlight of my trip was with a charming young man at a very Hong Kong bank. I posed your question and we worked through their risk assessment questionnaire.
Having done that, but not having been asked for my card, or what my job is, I was given a list of bonds to consider. I'd already checked these online - top-rated corporate Hong Kong dollar bonds yielding 1 per cent to 2 per cent. The risks were left unstated; instead, he pointed out a mainstream bond fund (containing US Treasuries and the like) "because the yield is steady".
After deducting the banks fees, he calculated a return in six months of 2.3 per cent. Sadly, he glossed over the chance of a fall in bond fund unit prices and I left reflecting on the confidence of youth.
The views presented are of a general nature. For specific advice, talk to a professional planner. See the column archive at scmp.com/askmelanie