Old turns to gold in market for retro flats
Big profits to be made as investors snap up apartments in SoHo and Mid-Levels
In today's real estate market $2 million doesn't go far but search out buildings dating from the 1950s and 60s and you may be surprised to find reasonable value.
Agents in SoHo and Mid-Levels say they have noticed a pickup in interest from both Chinese and western buyers in recent months who are seeking flats in old buildings as investment properties. In most cases that means the building are without parking, elevators or other amenities such as 24-hour security. On the plus side, the flats often have better floor space utilisation, high ceilings and other character touches that can help attract higher yields on the rental market.
Thanks to the recovering economy, a typical 550 square foot flat located in a quiet building near the escalator in Central should attract a minimum monthly rental of $8,000. Spend $100,000 to knock down a few walls, lay new hardwood floor and upgrade the kitchen and the monthly rental value should increase to $12,000 to $15,000, according to property agents in the area.
Assuming the flat was purchased for around $2 million and add renovation costs, the investment would offer a nominal yield of about 7.5 per cent. That is safely within the threshold of value investment according to financial analyst Henry Chan of Quamnet. To be extra safe, he advises looking at the deal using a formula where taxes, maintenance costs, building fees and other expenses are deducted from rental income. In most cases, the actual yield ends up about 80 per cent of the figure quoted by estate agents.
With more jobs being created in the banking and financial services industry, there shouldn't be too much trouble finding a tenant at a reasonable rent, according to Kingsway estate agent Brian Ng. Most flats that are upgraded to include modern kitchens and bathrooms generally last on the market for only a few weeks - even if they are priced at the high-end of the spectrum.
They can also be good bets on capital appreciation. The market for old flats in buildings around Mid-Levels and SoHo has risen about 50 per cent in the last year, according to estate agents. In some cases the appreciation has been more dramatic, with flats in well-located buildings on quiet streets with good air quality appreciating 80 per cent or more.
One example is a 400 sq ft flat located on the ground floor of a building on Prince's Terrace. A unique property with 6-metre ceilings, the property was purchased eight months ago for $2.68 million and has recently been put back on the market for $4.5 million. The owner undertook a complex renovation, converting the flat into a duplex with a spiral staircase.
The bigger problem is finding the available stock. The best value flats move quickly, agents say, while those in the most desirable buildings are sold to wait-listed buyers before they are listed. Supply in some areas is so tight prospective buyers are canvassing buildings and posting notes in mailboxes inviting owners to sell. Mr Ng says he recently sold a 550 sq ft rooftop flat overlooking the Jamia Mosque for $2.1 million.
'There is a lot of interest,' Mr Ng says. He advises buyers to look for well-located properties in the 800 to 900 sq ft range because of the strong rental demand. Average prices for flats in this range are about $4.5 million.
The best idea, he says, is to leave your contact details with an agent along with a note explaining your price bracket and desired location. Many of the properties in older buildings are family owned, and it's not unusual for families that have been refusing to sell for years to suddenly reverse their stance.
Ironically, rising interest rates are beginning to change some attitudes towards selling, according to estate agent, Regina Poon of the Central Property Agency. When interest rates were almost zero, families with multiple investment properties saw little point in selling. Now that they are rising, selling up to put money in the bank makes sense.
The consensus view among economists is for another 1.5 percentage point hike in US interest rates before a rate-easing cycle begins next year.
Apart from finding the property there are other hurdles in the buyer's path. For starters, there is little transparency in the market as most property agencies consider it too small to track. That means it can be difficult to find information on price trends and transaction volume. Adding to the uncertainty, estate agents often seem vague and non-committal about the details of recent transactions.
Another problem is local banks provide relatively poor mortgage financing. Financial institutions will usually offer only up to 70 per cent financing on the estimated value of a flat more than 40 years old. Because property estimates usually lag market prices, the end result is often banks only provide 50 per cent mortgage financing on the sale price.
Critics say the system is biased towards new properties and part of a cartel between the property developers and government to support the land premium system.