Property investment

Strategies for beating the housing bust

PUBLISHED : Monday, 10 December, 2012, 12:00am
UPDATED : Monday, 10 December, 2012, 6:07am

Hong Kong has followed Singapore's lead in trying to curb its residential property market by diktat. It has imposed its first restrictions targeted at non-locals, charging non-permanent residents a special stamp duty of 15 per cent. The administration also toughened existing measures designed to cool the property market, boosting the stamp duty from 15 to 20 per cent on the sale price on properties held for less than six months.

The volume of home sales has slowed dramatically, and prices are starting to fall.

So where can a property investor find shelter in this chilly policy climate? The most obvious tactic is to switch to another sector. For example, there has been a well publicised boom in the price of Hong Kong car parks, which has encouraged developers such as Cheung Kong, Wheelock, Sino Land and Sun Hung Kai Properties to sell spaces at their developments. High-end spaces now sell for around HK$2 million.

"The switch away from residential is quite natural," Antonio Wu, the executive director of investment services in Asia for Colliers International, says. He notes that a car park at Kingswood Villas in Tin Shui Wai goes for about HK$330,000, and that leasing of the space yields an annual return of about 4 per cent. "With the current situation in Hong Kong, I think everybody knows inflation is going to rise. It would be a bad idea if you just hold onto the cash. So people will buy assets," he says.

On the downside, you normally can't get financing on a car park space. Moreover, Nicole Wong, a property analyst at CLSA, thinks such investments are overrated. She says the recent run-up has taken car-park prices beyond their fundamental value, and that too many small-time buyers have gotten involved because the entry point for investing is low. This has led to a mini bubble in pricing.

Industrial, retail and office property may offer better options. But the price tag is generally hefty, so it is no small step to move over to commercial real estate.

There's a joke in Asia that if you want to really be somebody in business circles, you've got to own your own hotel. There's a good reason for the jest - Hong Kong is the second-most expensive market for hotel purchases, at US$785,000 per room. (London heads the list at US$1.08 million, New York City is in third place at US$736,000, and Singapore is fourth at US$684,000.)

"Hotel investment is more for those with deep pockets, like family offices and high-net-worth individuals," Donald Han, a consultant who compiled those figures in a paper on hotel investment for the HSR Property Group, says. "Your investments tend to be a bit more long term."

Yields on hotels range from 4.5 per cent to as high as 8 per cent, for instance, in Australia and Japan.

Bonds are another popular way of taking a punt on property. Many Chinese home builders sell their bonds here, either in US dollars or in the form of yuan-denominated dim sum bonds.

There is close to US$20 billion in high-yield property bonds trading in Hong Kong, from 32 companies, say bond analysts. High-yield bonds are those rated below BBB-, or are unrated. These can pay hefty coupons. The unrated China-focused developer Shui On Land in early December priced a five-year bond yielding 10.5 per cent in late November, according to Reuters.

Bonds have proved a popular way of raising cash at a time when Chinese property companies have been largely shut out of the share markets, and Chinese banks have been ordered to cut real estate exposure. Firms have turned to offshore bond markets, one of the few funding channels still open.

Through late November, developers had issued bonds worth US$7.4 billion in Hong Kong, at a similar pace to 2011, when property companies raised US$7.7 billion for the full year. Both years represent a huge jump in issuance since 2009, says an analyst, who did not want to be named.

"[It was] mainly private banking and high-net-worth investors who got involved [in the China property bond market] at the beginning of the year," says the analyst. "They were the major group of investors who bought the bonds at their lows. Then in June and July, following a massive outperformance, institutional investors got involved."

The big drawback to bonds is the high barrier to entry, with a minimum entrance point of about US$200,000. The bonds are also illiquid, and tough to sell during turmoil. Bond pricing is often opaque, requiring repeat calls to brokers to get a feel for the market.

Still, "we have never seen a single case of bond defaulting in the property space, even back in 2008", the analyst says, referring to the Lehman Brothers collapse. Despite Beijing's restrictions and a cash crunch for many mainland developers, "this year even the weaker developers that have bonds coming due managed to repay".

Coastal Greenland, for instance, managed to repay about US$120 million in bonds this year, despite having been downgraded by Standard & Poor's to a CCC rating, implying imminent default. It sold assets and arranged a loan to pay back bondholders.

For those who can't put down US$200,000 without blinking, there's a more liquid and transparent option. Asia's real estate investment trusts, or reits, have attracted a lot of attention this year.

They have offered investors a mix of income and growth, and have benefited from rising property prices. Better to buy a Singapore shopping mall than stick the money under the mattress, or leave it to languish in the bank, it seems.

Graeme Newell, a professor at the University of Western Sydney, says Asian reits yield generously. Regulations require that they pay out most of their profits as dividends. The instrument can still catch growth from rising property prices, as Hong Kong reits have demonstrated in recent years.

"Reits are subject to a lot more regulatory oversight, and media oversight to be honest, relative to developer stocks," Newell says. "So there's no reason why this performance shouldn't continue."

Be aware that many Hong Kong reits involve heavy financial engineering, and their recent strong price growth could go into reverse if the local property market turns down. But for those looking for something conservative, Hong Kong's The Link Reit is one of the biggest in the region, with a market cap of US$10.3 billion.

While its portfolio of suburban shopping malls and car parks may seem pedestrian, there's a good case to be made for the stock as a "widows and orphans" holding, much like a utility company or bank, that throws off regular cash and is unlikely to go bust.