Gaining on Rising Rents (14/03/08)

The resilience of stock prices and investors’ confidence has been put to a serious test as the Hang Seng Index easily lost 1,000 points in a single day session these days showing lacklustre strengths to regain an uptrend. In the face of the credit crunch and the impact of financial institutions’ debt trimming exercises, the US Federal Reserve demonstrated its absolute power to keep everything under control with repeated interest rate reductions and capital injections into the market. The pro-active initiatives are well designed to cope with the risk of illiquidity but the market’s confidence has been undermined so much that investor sentiment is still overshadowed by a spate of negative reports. However, pessimists should think again in their investment strategy and take note of the US determination to rectify the problem with strong measures, or they could take a hit badly as a result of the market’s recovery.

Upgrading Investors’ Understanding
The Hang Seng Index has fallen by more than 30% from 32,000 points in October last year to about 22,000 points recently, which already accounted for virtually all of the negative news and unfavourable factors. Investors should think twice if they hear of more so-called bad news, which could be nothing more than old news. History tells repeatedly that most people in the investment market are highly vulnerable to sentiment – they are out in force to enter the market together and race to leave the scene against market fears and uncertainties. After their own panic sales and dumping stocks, many of them would often point their fingers to the big market players and accuse them of manipulating stock movements. It is true that the powerful players have clear advantages but every investor makes his or her own choice and should take responsibility for their respective decisions to chase, hold and sell off their stocks. With the globalised financial market environment, an overall education programme for investors should be put in placed to improve their knowledge and understanding.

Selling Stocks for Property
The stock market’s increased volatility is actually no news to everybody. Have you made any move or reviewed your investment strategies against the market’s dramatic changes over the past six months? The residential property market posted a strong rally in the fourth quarter of last year as average prices of 50 major estates rose by more than 10%. For the whole of 2007, the increase of home prices exceeded 20%. Investors who have cashed in their stock holdings to purchase property should be able to maintain their wealth protection and appreciation – reaping better returns than average market players. The repeated US interest rate cuts arising from the subprime mortgage crisis forced Hong Kong banks to lower interest rates accordingly, thus aggravating the trend of negative interest rates in Hong Kong. The trouble water of subprime mortgages turned out to be a booster to Hong Kong’s property market, which actually took many investors by surprise.

Switching from rent to buy
With the advance of oil prices to new highs and the inflationary pressures from the Mainland and the US, consumer prices and rental costs in Hong Kong are set to rise further. Average residential rents per square foot have increased by about 7% in the first two months of this year, making a total increase of more than 25% since early 2007. Current rents have returned to the levels as at the end of 1997. But there is ample room for more rental growth, thus driving up further local inflation and property prices.

Tight supply of new flats
According to the latest government statistics, private housing completions are expected to be less than 11,000 units this year, an increase of about 500 units from last year. The new supply will be significantly less than the average completions of 23,000 units per annum between 2002 and 2006. With an exceptionally low supply and sustained strong demand, the number of vacant flats fell to less than 52,500 units last year, a relatively low level in recent years. Property prices are set to rally and take off again with the imbalance of supply and demand. Home-seekers and tenants wishing to switch from the rental sector to purchase should make up their mind as early as possible.