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SCMP Reporter

IS NOW the right time to invest in property? And, if so, where?   Newspapers seem to be full of property advertisements from around the world. To those of us who are interested and have the necessary resources, properties over the last month have been advertised in Hong Kong from such diverse locations as Canada, Britain, continental Europe, China and Malaysia.

  If you want to buy for residential purposes then it is more a question of where you intend to settle. However, if you are looking for a pure investment property, there are a number of criteria to bear in mind.

  The first and most obvious one, but equally the most often forgotten, is that most property investments are not passive investments.

  Sometimes property investments work smoothly and you have no problems with tenants. However, there are sufficient horror stories around that demonstrate the fact that tenants are not always the most reliable people.

   If you have a bad tenant, much of the benefit of investing in property can easily be eroded.

  Looking at a classic economic cycle then what tends to happen, in order, is as follows: inflation falls, interest rates fall, bond prices go up, equity prices go up, property prices go up; inflation rises, interest rates rise, bond prices fall, equity prices fall, property prices fall.

  Taking the British property market as an example one can plot the following dates and occurrences that match the above theory.

  Late 1988-early 1989 inflation rises, late 1988-early 1989 interest rates rise, bond prices fall, equity market falls and then last of all (early 1990) property prices begin to fall and continue their fall until late 1992.

  Then Britain leaves the artificial Exchange Rate Mechanism (ERM) and interest rates fall rapidly, bond prices rise, equity prices rise. The next move is for property prices to rise.

  Property prices tend to be the last to react to the stimulus of low interest rates because buying bonds or equities is an almost instant transaction, the vast majority of such transactions are done by the large institutions. However purchasing property, on average takes considerably longer (minimum six weeks, but normally two to three months).

   Thus even in 1989 when all the signs abounded for a fall in property prices, they still rose for about 12 months even after equity prices began to fall.

  Moreover, most residential properties are bought by individuals who don't have the time nor inclination to study markets accurately on a constant basis. Thus the first sign to look for when contemplating a good location for a property investment would beto find a country or territory that has already enjoyed low interest rates for sometime but has not yet enjoyed a rise in property prices.

  The most obvious countries to buy would be the US, followed by Canada, Australia and Britain.

  One of the most obvious mistakes made by a large number of investors is to buy at the top of the market and not at the bottom. Clearly property prices in the above four locations have fallen, sometime quite dramatically over the last three or four years and therefore they pass the first golden rule in that the fundamentals are right.

  The trend as explained above is not necessarily 100 per cent accurate because confidence in the market is also an essential ingredient. Confidence is far harder to define and many economists continuously try to ascertain the accurate turning point, whichis based on confidence.

   In layman's terms confidence can be defined as the difference between a glass of water being half full (Hong Kong) and half empty (major cities in the US, Australia, Canada and Britain).

  By implication from the above these markets should be on the turn. However it may take a number of months or even years. Yet as long as the fundamentals are with you and you have not been in the situation to over stretch yourself you should be able to ride out the lead up to the increases in capital values.

  Because interest rates are still due to fall in many European countries, property purchases in these countries ought to be avoided for the time being.

  When making investment many people in Hong Kong tend to forget how lucky they are being based in a place of such low taxation. When one ventures abroad there is often tax to be paid both on the income derived from that property (rent) and the capital gain from the eventual sale of that property.

  Purely from a tax point of view one of the most attractive countries for an investor to look for property must be Britain where, with good financial planning, the investor should end up paying little or low tax on both profits and the eventual capital gain.

  The crucial fact here is ''good financial planning''. You are not likely to get this from an estate agent or a bank because they are not specialised in this area. A good financial planner will pool the different factors together; the loan, the property, the tax considerations, the repayment vehicle and give you an over view as to what is best for you.

 If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.



How to avoid horrors of property investment