Updates On HK Property Market

Despite concerns over a property bubble in Hong Kong and government efforts to cool the red-hot sector, two Hong Kong tycoons: Cheung Kong Holding’s Li Ka-Shing and Henderson Land’s Lee Shau kee have been snapping up shares in their own firms.

Robert Halili, Managing Director at Asia Insider told CNBC on Wednesday, this insider buying is encouraging news for shareholders and investors looking to bet on the real estate sector.

“The one thing I want to point out to investors is that whenever these 2 titans buy at the same time, it is almost like a solar eclipse. It only happens once in a blue moon.”

Out of the $2.6 billion dollars invested in property-related stocks over the last 10 weeks, according to Halili, Lee Shau-kee’s purchase of 39 million shares in Henderson Land accounted for $2 billion or 76 percent of the total amount.

“Prior to this year, the chairman [of Henderson Land] acquired an average of 8.5 million shares worth $309 million per year from 1993 to 2010,” he added.

So, who do you believe, the property tycoons or the more rational government officials and analysts???

Protestors are on the streets all around the world these days. In Europe people are angered by harsh austerity measures, in the Middle East they are trying to topple failed governments and on the mainland protests are invariably sparked by some form of brutality — driving over a protestor in Mongolia or pushing around a pregnant street vendor in Guangzhou. The world’s masses seem to be taking to the streets.

Except in Hong Kong, where life goes on in its disconnected-from-the-woes-of-the-rest-of-the-globe bubble, which is of course encapsulated in another bubble: the housing one. Property prices remain outlandishly high, despite signs around the world that the economic outlook isn’t exactly rosy.

The reasons are myriad, yet simple. The masses are provided with subsidised public housing. The next layer, the middle class, owns housing that is then rented out, often to foreigners whose companies enable them to discount the rent from their taxes, providing enough of a subsidy to let them rent a small flat with a maid’s room for the same price they would pay back home for a McMansion with a garden, pool and two-car garage in the suburbs of a major metropolitan area. Their landlord doesn’t need to work, but rather lives off the rental income. Then there’s the next layer — housing owned by wealthier Hong Kong families or corporations that is rented to companies that pay outlandish rents for their senior expat staff. The company writes it off as a business cost and the Hong Kong family or business laughs all the way to the bank.

The Hong Kong Monetary Authority (HKMA) has tried to keep the genie in the bottle through policy measures. On June 10, Norman Chan, the chief executive of the HKMA, announced the latest tightening measures: with immediate effect, a 50% down payment will be needed for transactions of more than HK$10 million ($1.3 million), from the previous limit of HK$12 million. Down payments of 40% are needed for homes costing between HK$7million and HK$10 million (previously the band was between HK$8 million and HK$12 million) and subject to a maximum mortgage cap of HK$5 million. A 30% down payment is still applicable for homes below HK$7 million (previously HK$8 million). The HKMA also imposed a new rule, lifting the down payment requirement by 10% for mortgage applications with principal income sourced outside Hong Kong, but of course if this is targeted at mainland buyers (more on them later) it’s meaningless, as most don’t borrow from Hong Kong banks anyway. As a result, analysts have generally viewed such tightening measures as having a limited effect.

Rating agencies such as Standard & Poor’s forecast a stable outlook for Hong Kong’s property market, though sensibly warn that the market is vulnerable to external shocks. S&P notes that the credit profiles of rated developers have a reasonable buffer thanks to that recurring rental income from a diverse population.

But it cautions about the possibility of a “sharp correction in prices”, noting in a June 14 report that “affordability has deteriorated because of high prices and could weaken further if interest rates rise from their current low levels”. The rating agency further points out that “strong liquidity could reverse because capital flows are fickle. Hong Kong is susceptible to external shocks, due to its open economy and free capital movement”.

External shocks to watch out for include “a sharp rise in interest rates, a hard landing in China’s economy, and a significant adjustment in equity markets", Christopher Lee, director corporate ratings for S&P, said in an interview.

The China connection
The recent financial crisis underscored one of the most important buyers in the Hong Kong market of late: mainland Chinese. During the crisis, Chinese investors flooded to Hong Kong, snapping up property, particularly in the high-end residential sector. And the influx continues.

According to Centaline, 24.9% of all primary transactions were by mainland buyers in the first four months of 2011, up from 24.1% in the second half of 2010. They are most active in the high-end property market, making up 38.1% of buyers in the primary market and 22% in the secondary market for transactions above HK$12 million, an increase from 33.8% and 20.8% in the second half of 2010, respectively.

That’s good for Hong Kong developers, but bad for renters or other potential buyers, who have stood on the sideline watching prices skyrocket. But a shock to China’s economic and credit conditions could trigger a correction in the high-end property market, which would then have a knock-on effect in mass-market prices, notes S&P. That shock might already be in the works. In the same report, S&P downgraded China property, pointing out worsening borrowing conditions.

If the mainland market cools and oversupply ensues, cash-strapped developers could fall into a price war to attract customers, who might then reconsider buying back home rather than in Hong Kong.

For our readers, many of whom have tried to play the Hong Kong property market by buying property here in the hopes of flipping it before leaving, it’s possible you’re sitting on — or nearing — the peak of this cycle.

“We believe the various measures that have been put up have brought a cooling effect to the secondary market, and thus transaction volume will stay low given a reduction in both supply and demand, continuing policy risks and concerns about potential asset bubbles,” explained Ken Yeung, Citi’s Hong Kong real estate analyst.

“Prices that are supported by thin transaction volumes may not be sustainable,” added S&P’s Lee.

Of course, it depends on what you own — and are trying to sell. Colliers International reasons that supply-demand imbalances and inflationary pressure continue to drive rents upwards. The average luxury rent increased 3.62% quarter-on-quarter in the first quarter of 2011 to HK$45.42 per sq ft per month, only 0.7% below the previous peak in mid-2008.

“In spite of the market consolidation in terms of sales volume during the short-to-medium run, the sustained low-interest-rate environment, rising inflation and tight luxury residential supply will drive the price growth for luxury residential further. Luxury residential property prices are forecast to grow 6% in the next 12 months,” Colliers forecast in a recent property report.

Some property specialists (particularly those who aren’t employed by companies trying to sell you property) note that the so-called supply shortage in Hong Kong is a myth. By some estimates there are as many as 200,000 empty flats in the city — certainly not a shortage that warrants price hikes. So why the high prices? Landlords are willing to sit on empty (unrented) supply.

“Prices have been sustained by the flood of liquidity and currently very low interest rates,” said Lee. “There may not be a shortage of apartments, but landlords are not renting them at below market rates. Therefore, prices are sustained by expectations of prices remaining high or continuing to grow.”

In other words, market fundamentals be damned. Given the eternal optimism of Hong Kong developers and sellers, trying to time the market is even more difficult in Hong Kong than anywhere else, and in the best of situations it is as safe a game as juggling lit firecrackers. The high could be this week, or a year from now, or five years from now. But given the global skittishness, it’s perhaps time to take a look at how much you’ve made from a property investment, and question if it’s good enough.

Bears Are Prowling

On June 10, the government announced the launch of eight sites for sale, on which it expects developers to build 6,000 flats. The move coincided with an order from the Hong Kong Monetary Authority that banks should lend no more than 50 per cent on homes valued at above HK$10 million (US$1.3 million) (down from a cap of 60 per cent).

The authority for the first time also added tougher restrictions on non-resident borrowers. Momentum is also building for the government to revive its subsidised Home Ownership Scheme, suspended in 2002. Koh said the resumption of the scheme would shorten the cycle, bringing the correction forward into the second half of this year.

“Things have certainly taken a turn for the worse,” said Lee Wee Liat, head of regional research at Samsung Securities (Asia). The government’s willingness to resume building subsidised housing for sale, together with measures targeting foreign investment demand, showed a determination to cool the market down, he noted. “A short-term correction is now possible,”

he said.

The latest data suggest a slowing in demand. Just 21 new homes were sold over last weekend — down from the 47 homes sold over the previous weekend, according to Samsung.

Secondary transaction volumes also fell to their lowest level so far this year, with just 21 flats sold at the 10 largest residential estates tracked by Midland Realty, down from 24 the previous weekend.

Developer Cheung Kong (Holdings) has lowered asking prices at its Uptown apartment block in Yuen Long by between 5 per cent and 8 per cent, putting new average selling prices in the range of HK$5,300 (US$681) to HK$5,500 (US$706) per sq ft, noted Lee in his latest research report.

Country Equity Markets' Performance YTD

Global stock market country's performance on a year to date basis yielded some interesting observations. The respected Bespoke Investment Group has featured the table below recently. The average year to date change for all 82 countries is 5.39%.

The S&P 500's year to date change of -1.24% is obviously below both of these. The US currently ranks 53rd out of 82 in terms of 2010 performance.

At the top of the list is Sri Lanka with a 2010 gain of 73.69%. Bangladesh ranks second at 49.37%, followed by Estonia 41.94%, Ukraine 40.86%, and Latvia 40.26%.

The bigger emerging markets have not fared so well. India has been the best performing BRIC country so far this year with a gain of 4.33%. Russia ranks second at 1.42%, Brazil ranks third at -2.43%, and China is down the most at -18.97%.

The developed markets have also fared poorly so far. Canada is currently the top G7 country with a gain of 3.26%. Germany and Britain are the other two G7 countries that are up year to date but only just, while Japan is the G7 country that is down the most year to date (-13.58%).

Overall, Bermuda has seen the biggest losses this year with a decline of 38.25%. Greece is the second worst at -24.56%.

It looks like the flow of funds indicate a benign investing environment for the bigger markets, be it emerging or developed. Its still a tug of war, a delicate balance between the bulls and the bears. To break it down, its torn between the group that thinks that most of the developed nations may still be in for a double dip or that the stimulus programs have run its course. The other group thinks that there is still immense liquidity staying on the sidelines which may flow back into equities in a big way this year.



I am in the latter camp. To me, if you think there is the likelihood of a double dip, it will still translate to a low interest rate environment or that more stimulus will be offered. Both still bullish factors.

If there is no double dip, some of the liquidity will move back to equities to get better returns. Hence it is a inherently better to be long and bullish on stocks for the rest of the year.

Malaysia, together with Thailand and Indonesia have done very well, notching 12.8%, 26.6% and 24.8% respectively.



The other fact which I find comforting is that markets are not ignorant, they have penalised Japan and China markets heavily so far this year. Japan, for further aggravating their deflationary economy. China for having to continue to tighten the taps to control over exuberance in property and indiscriminate lending.

What People Are Saying About The 10MP

Citi analysts Wei Zheng Kit and Monica Ratnaputri wrote in a June 10, 2010 analysis titled, "Highlights of the 10th Malaysia Plan," that the most important factor of the plan is its actual implementation, given missed targets in the past. The plan calls for a reduction in the budget deficit to 2.8% by 2015. However, the government has missed previous five-year targets. Of the MYR230 billion allocated to development spending, 55% will go to the economic sector, which is an increase over previous five-year plans, 30% to the social sector, 10% to security, and 5% to general administration. On the issues of subsidies, the plan calls for a 3% annual reduction in subsidy spending by 2015, with energy prices based on market conditions by 2015.



Citi analyst Yong Yin Ng wrote in a June 10, 2010 analysis titled, "10MP – Economic Reform: Ready, Set …," that the 10th Malaysia Plan will not move markets at least until the implementation stage. However, the plan lays out a commitment to economic and political reform, even if subsidy reform will be cautious as a result of political challenges. Ng writes that Malaysia needs to transition to an economy driven by productivity growth and domestic competitiveness that is led by the private sector. The targeted sectors in the plan are E&E, palm oil, oil & gas, tourism, agriculture and green technology and financial services, with the services sector as a whole pushing growth forward.

Kevin Brown writes in a June 11, 2010, FT blog post that the 10th Malaysia Plan unveiled on June 10 shies away from specific proposals to deal with the issue of subsidies and affirmative action, two benchmark reforms that would indicate Prime Minister Najib's commitment and ability to implement far-reaching reforms. PM Najib will likely face challenges from his own party, the UMNO, if he moves forward on significant reforms to the affirmative action policies.



The Oxford Business Group writes in a June 10, 2010, analysis that the impact of the 10th Malaysia Plan will depend on how well it enhances the role of the private sector while reducing the footprint of the government; protects the more vulnerable segments of society; addresses expensive subsidies; and contributes to the development of human capital.

The 10th Malaysia Plan prioritizes the oil and gas sector as one of the 12 National Key Economic Areas (NKEA) that will drive growth over the next five years, according to a June 11 IHS Global Insight report. The plan calls for focusing on improving oil recovery, transitioning toward more clean energy sources, enhancing energy efficiency and beginning to reduce fuel subsidies.



I don't have anything to say about the 10MP. Its been there on the table, the mantras are nothing new. Let's see some action on the Approved Permits already; why are there still big projects being "given" without proper tendering in recent months; the list goes on...

My Views On Rubber Gloves

Many people have been asking my views on the rubber glove makers. They have all been on a torrid run for most of 2009. I did not spot the sector early enough, hence I did not highlight that sector as an entry position for the past few months. You cannot be spotting everything. Just because you did not get that sector does not mean one should deride that sector - kudos to those who went in early, ride the trend as best you can.

You look at every single report, the potential upside catalysts are always good results and improving earnings driven by ongoing capacity expansion. Not that I am bitching here, one should also learn to scan for time to take some chips off the table - name me one research report that is a "sell" or a "downgrade" on rubber glove makers ... none, there have been none for the past 11 months. So basically, everybody have been asking everybody to buy, everybody have been basically long or longer ... so who have been selling?

The sector is having a strong run, no doubt. But guess who is selling? Well, the people who anticipated this kind of run more than 12 months ago, and company owners and insiders as they have the most shares to sell. I am not suggesting that owners are selling the shares as a scammish thing, its just the natural thing to do - yes, it is acceptable to like your own stock and tout it to the papers and still sell some shares.

Why I think its time to take some chips off the table: the storyline is getting repetitive (capacity, earnings growth, product mix, and a genuine concern on potentially global pandemic diseases). There is like no "bad factor" at all, how can things be so rosy for so long? Well, they can't. I do think the catalysts are there, but I also think that the catalysts are getting very old.

Its like so many good stuff and optimism have been priced in, there is little room for bad news. When investors begin to shout "where got bad news" ... you know it has gone too far.

Just be careful out there. Oh, not all glove makers are the same, I prefer Hartalega among the whole bunch. Plus be careful on the ones with a much bigger free float, go do your own research.



p/s photos: Nancy Wu Ding Yan

Asia Rising - Part Two

"Asian Capitalism Is More Dynamic."

Hardly. With the United States brought low by Wall Street and the European economy enfeebled by its welfare state and inflexible labor market, most Asian economies appear in great shape. It is tempting to say that Asia's unique brand of capitalism, by seamlessly weaving together strategic state intervention, corporate long-term thinking, and insuppressible popular desire for material betterment, will outcompete either the greed-devastated U.S. model or the hidebound European variant.

But though Asian economies-with the notable exception of Japan-are among the fastest-growing in the world today, there's little real evidence to suggest that their apparent dynamism comes from a mysteriously successful form of Asian capitalism. The truth is more mundane: The region's dynamism owes a great deal to its strong fundamentals (high savings, urbanization, and demographics) and the benefits of free trade, market reforms, and economic integration. Asia's relative backwardness is a blessing in one sense: Asian countries have to grow faster because they're starting from a much lower base.

Asian capitalism does have three unique features, but they do not necessarily confer competitive advantages. First, Asian states intervene more in the economy through industrial policy, infrastructural investment, and export promotion. But whether that has made Asian capitalism more dynamic remains an unresolved puzzle. The World Bank's classic 1993 study of the region, "The East Asian Miracle," could not find evidence that strategic intervention by the state is responsible for East Asia's success. Second, two types of companies-family-controlled conglomerates and giant, state-owned enterprises-dominate Asia's business landscape. Although such corporate ownership structures enable Asia's largest companies to avoid the short-termism of most American firms, they also shield them from shareholders and market pressures, making Asian firms less accountable, less transparent, and less innovative.

Finally, Asia's high savings rates, by providing a huge pool of indigenous capital, undeniably fuel the region's economic growth. But pity Asia's savers. Most of them save because their governments provide inadequate social safety nets. Government policies in Asia penalize savers through financial repression (by keeping deposit rates low and paying household savers measly returns on their savings) and reward producers by subsidizing capital (typically through low bank lending rates). Even export promotion, ostensibly an Asian virtue, seems overrated. Asian central banks have invested most of their massive export surpluses in low-yielding, dollar-dominated assets that will lose much of their value due to the long-term inflationary pressures generated by U.S. fiscal and monetary policies.

"Asia Will Lead the World in Innovation."

Not in our lifetime. If you look only at the growing number of U.S. patents awarded to Asian inventors, the United States appears to have a dramatically receding edge in innovation. South Korean inventors, for example, received 8,731 U.S. patents in 2008-compared with 13 in 1978. In 2008, close to 37,000 U.S. patents went to Japanese inventors. The trend seems sufficiently alarming that one study ranked the United States eighth in terms of innovation, behind Singapore, South Korea, and Switzerland.

Reports of the death of America's technological leadership are, to paraphrase Mark Twain, greatly exaggerated. Although Asia's advanced economies, such as Japan and South Korea, are closing the gap, the United States' lead remains huge. In 2008, American inventors were awarded 92,000 U.S. patents, twice the combined total given to South Korean and Japanese inventors. Asia's two giants, China and India, still lag far behind

Asia is pouring money into higher education. But Asian universities will not become the world's leading centers of learning and research anytime soon. None of the world's top 10 universities is located in Asia, and only the University of Tokyo ranks among the world's top 20. In the last 30 years, only eight Asians, seven of them Japanese, have won a Nobel Prize in the sciences. The region's hierarchical culture, centralized bureaucracy, weak private universities, and emphasis on rote learning and test-taking will continue to hobble its efforts to clone the United States' finest research institutions.

Even Asia's much-touted numerical advantage is less than it seems. China supposedly graduates 600,000 engineering majors each year, India another 350,000. The United States trails with only 70,000 engineering graduates annually. Although these numbers suggest an Asian edge in generating brainpower, they are thoroughly misleading. Half of China's engineering graduates and two thirds of India's have associate degrees. Once quality is factored in, Asia's lead disappears altogether. A much-cited 2005 McKinsey Global Institute study reports that human resource managers in multinational companies consider only 10 percent of Chinese engineers and 25 percent of Indian engineers as even "employable," compared with 81 percent of American engineers.

p/s photos: Nancy Wu Ding Yan

56 Cents To The Dollar = $1,000 Billion Additional Writedowns

Banks may need to write down another $1,000 billion, and this is already widely hinted in the markets. I would rather not take this as a negative but a positive. Additional capital will not be lost, its to boost the balance sheets. US regulators may force Bank of America, Citigroup and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on past Federal Deposit Insurance Corp. Assets sold under the Legacy Loans Program may be worth an average of 56.3 cents on the dollar, based on the results of FDIC auctions at failed banks over the past 15 months. In view of the potential losses, reports emerge of banks trying to game the system by bidding each other's asset prices up.

• GoldmanSachs and Mike Mayo report in their analysis that most banks carry unsecuritized loans at 92-98 cents on the dollar on their books. Moreover, most of the assets in the PPIP are loans.
• Details of past FDIC distressed assets auctions: The FDIC’s average auction value of 56.3 cents on the dollar for residential and commercial loans is based on 312 sales worth $1.1 billion since Jan. 1, 2008, according to the FDIC. The average for 348 commercial loans for which borrowers stopped paying was 32 cents on the dollar. Auction prices ranged from 0.02 cent to 101.2 cents on the dollar, according to the FDIC.
• Writedowns would total $1 trillion if the program buys $500 billion in loans at 32 cents on the dollar, the average for non- performing commercial loans in the FDIC sales.
• Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.
• The FDIC would auction assets after the Office of the Comptroller of the Currency, Office of Thrift Supervision or the Fed signals that a bank is in danger of failing.
• Treasury spokesman Isaac Baker said in an e-mail that the program is voluntary. "Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previously existed to help value these assets, and offering financing to help investors purchase them."
• The FDIC is considering allowing banks to share in future profits on loans sold to public-private partnerships to encourage healthier lenders to participate. The regulator is seeking comments through April 10 on the program.
• Banks have almost $4.7 trillion of mortgages and $3 trillion of other loans that aren’t packaged into bonds, according to the Fed. The vast majority are carried at full value because they don’t need to be written down until they default.
• While regulators don’t intend to publish the details of their stress tests, the results will effectively become known once banks announce how much capital they need to raise. Regulators will then give lenders six months to obtain funds from investors or taxpayers as a last resort.
• The government’s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors.
  
• Including TARP, the U.S. government and the Fed have spent, lent or guaranteed $12.8 trillion to combat the financial collapse and a recession that began in December 2007. The amount approaches the $14.2 trillion U.S. gross domestic product last year.

p/s photos: Nancy Wu Ding Yan