The property market ten years on – has much in reality changed?

Implications: When one hears today of significant short term capital gains being made through trading at the top end of the residential market, one might be forgiven for thinking that not much has changed since the heady days immediately prior to the handover in 1997. In practice, however, the situation is very different in that it is only within this relatively small segment of the market that such speculative opportunities have arisen, and then only over the last two years. By contrast, in 1997, speculation could be found in all sectors and a “pass the parcel and hope that the music does not stop” mentality prevailed and contracts could be flipped within a matter of days. Even today, the short term investor is likely faced with 6-12 months of ownership before being able to take his profit.

Analysis:

The reality, of course, is that it was all too heady and the music had to stop, which it did very suddenly and hundreds of thousands of families found themselves in negative equity. Today, certainly in the case of the mass residential market, we have a purchaser who deliberates longer, who is influenced by affordability, who is discerning in terms of locality, finishes, management, facilities, etc. and who envisages living in the premises for a period of years – in essence, someone who treats the purchase as an investment whereas ten years ago property was largely regarded as a commodity to be traded at the earliest opportunity.

The other significant difference, which is an extension of the new investment mentality, is the flight to quality and lifestyle. This, of course, is partly attributable to the economic recovery which has taken place over the last three and half years but more particularly to a growing interest in the environment and quality of life. Who, for instance, would have thought in 1997 of senior executives buying multi-million dollar houses in the NewTerritories and commuting to work for the sake and benefit of their families?

We have seen a similar transformation in the commercial sector where the recovery of the economy has resulted in increased end user demand, be it by owner occupiers or tenants, and this in turn has been translated into record rental growth, particularly in the major business districts. We have also seen the advent of the institutional investor and increased allocation of investment funds not only to real estate but also to Asia. This appetite has led to significant yield compression and consequent increases in capital values, such that, in reality, any latent margin for the trader has been eroded. This contrasts with ten years ago when, notwithstanding that the returns were considerably higher, the market was regarded by the institutions as far too frothy. It is interesting to see how those who in 1997 would have discounted heavily for a half empty building now rationalize the situation and contend that what previously was a problem is now an opportunity to secure market rent.

Another significant change is, of course, the acceptance by Government that it should not be in the business of providing housing except for those who cannot adequately help themselves and that the private sector is better equipped to respond to market demand at all levels. This is also reflected in Government’s acceptance that it should not try to second guess the market by designating the number of sites to be sold at auction or tender each year but rather, by introducing the Application List System, it would allow the market to decide, although reserving the right not to release sites unless underwritten by a bid close to market value. The other interesting change is one which is largely a function of demographics in that ten years ago we were talking about producing 85,000 residential units a year while today Government is now telling us that 15,000 units per annum is sufficient to meet current and future demand.

The other major difference is the development environment where many things prior to 1997 were rationalized on the grounds of growth and that Government knew what was best for Hong Kong. As we have seen recently that model is no longer sustainable and we have a community that not only wants to be involved but also has strong views on densities, building heights, roads, air circulation, sustainability, heritage, etc. This, of course, makes the development process more complex and time consuming but it is a natural reflection of a maturing market where ownership and belonging, in all senses, are increasingly important.

And finally, a cautionary tale. If you were to have left your money on the stock market you could be 43% (the overall increase in the Hang Seng Index for the period) better off today than in 1997, which is a salutary lesson for those who placed their faith in real estate and bought then and are just now beginning to see a little daylight!