Down 10% from Last September’s highs, Hong Kong residential property prices are sliding fast. Peter Churchouse discusses what’s currently influencing the market and which way the market may move next.
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Angie Lau: Well let’s dig into this a little deeper, Hong Kong has one of the least affordable housing markets in the world. Monthly sales fell to a 25 year low in January, with major property stocks trading at what may be seen as distressed levels. Let’s assess the situation with Peter Churchouse now, long time property analyst at Morgan Stanley, now of The Churchouse Letter.
Peter Churchouse: Good morning.
Angie: Good morning to you, when you take a look at the landscape, less cranes out, auctions are not being met in terms of minimum bids, what is the state of the Hong Kong real estate market?
Peter: Well the Hong Kong real estate market’s being affected by two things really, firstly domestic factors, one of which is the government policy. Government has been hell bent on driving the corporates and the Chinese buyers out of the market by increasing stamp duties to exorbitant levels. They’ve also increased stamp duties for the domestic buyers as well, which has meant that the secondary market has been really under a lot of pressure, it’s been crushed, but it’s been easier for people to buy in the new market. In the last month or so, the developers have released much fewer properties than they have in the last 6 or 9 months, so that’s why we’ve seen a very low level of sales in the last month.
Angie: Now how much of this, as well, is the perception that Hong Kong is slowing down because of China?
Peter: Oh yes, I mean there’s definitely the domestic factor here and there’s also what I might call the Soros factor. Certainly, people are concerned that growth in China is slowing, growth in Hong Kong is slowing, we may see a rise in unemployment, the Fed has raised interest rates, that means that rates are gonna rise in Hong Kong, and there’s this overbearing concern about the renminbi and the currency, which I think stock markets and property markets in Hong Kong have always been very closely related. So a weak stock market also translates through into concerns in the property markets as well.
Angie: Absolutely, in fact, Hong Kong is one of the major markets in this global environment that sees that really direct link correlation between stock markets and property markets.
Peter: Oh absolutely, and that’s largely because of the peg. The pegged currency which really links U.S. interest rates and the stock market, to the property market.
Angie: So what’s the outlook for 2016?
Peter: I think we’ve seen about 9 and a half percent decline in property prices since the peak in August-September of 2015. We’ll probably see another 10 or 15 percent over the course of the next 12 months or so. So I think we’re going to see a bit more downward pressure and as a result we’re seeing very interesting opportunities in stocks right now, because they’ve been crushed.
Angie: Alright, which stocks are you looking at specifically.
Peter: Well I look at the Hong Kong property developers and the property investment companies. They’re trading at 50 to 55 percent discount to their underlying asset value. They’re trading at single digit multiples. They’re some of the most lowly geared property sector in the world. Way more lowly geared than the U.S. or in Europe for example.
Angie: So they’re not highly leveraged?
Peter: Not highly leveraged. I mean, Cheung Kong Properties for example has 2 percent net gearing. Sun Hung Kai Properties is the third or fourth biggest property company in the world, 10 percent net gearing. Dividend yields 4 and a quarter, 4 and a half percent.
Angie: Okay, so not a lot of debt overhang for, at least local developers. But a lot of debt overhang in general for China.
Peter: Oh, absolutely.
Angie: Right? I mean, that’s got to play on mainland Chinese investors.
Peter: Absolutely. The debt in China is very different from what we see in Hong Kong. The average debt levels in this sector in China are 4 to 5 times the levels that they are in Hong Kong. So I think there’s much more systemic risk in China property companies, but again if you look at big China listed companies that are listed in Hong Kong, that’s probably not the case. But there are thousands of others out there.
Angie: How about an investor of a different sort, people who are actually looking to buy property and maybe rent property. I mean, are rents going to go down as a result?
Peter: Rents will probably go down, but much less. That’s typically the relationship is that rents go down less than prices. If you’re looking to buy in Hong Kong, it’s extremely difficult. You’ve now got to come up with 40 to 50 percent down payment, and then you’ve gotta pay a big stamp duty up front, cash on the knocker, so it’s very difficult. The government here seems to be hell bent on driving people out of the property market, and I think they are achieving their objective, they are driving them out.
Angie: Yeah, and with prices forecast to drop a little lower, probably people waiting to see how low it can go before they buy in.
Peter: Well yes, and I suspect you’ll see a pick up in sales later in the year, if we see a little bit of a recovery in China.
Angie: Peter Churchouse, thank you so much for joining us today.