Bull or Bear?

July 20, 2009

For people who had burnt their fingers or lost their shirts in securities or security-linked financial products, the memory is still fresh. That’s why many of them turn to real estate, which seems to be a safe bet in the volatile investment market. This is one of the fundamental reasons why the property market, especially the luxury properties, has bucked the trend of the economic recession.

Despite declining rentals, sale prices of all luxury properties have recorded varying degrees of gain. High quality properties in sought after locations like The Peak, Southside and Midlevels have reclaimed more than the losses due to financial tsunami. Successful transactions of big properties involving more than $100 million are a strong manifest of the level of confidence. Rental yields on these luxury properties have slid to below 2% per annum, meaning that investors are more than willing to take rentals that are lower than mortgage payments, because they believe in the long term growth potential of this type of property.

Beijing government vows to ensure an 8% GDP growth in 2009. The first half of 2009 had an official growth figure of 7.1%, which makes an annual 8% seemingly achievable. However, this points to the need to continue the economic stimulation measures. Thus, one would not expect an about-face of the economic policies that have fuelled China’s phenomenal growth amid global recession any time soon. There have been speculations that quite a proportion of the capital injection by the Central government has been siphoned off to overseas equity markets. The speculations go on that this newly injected capital has also fanned the resurgence of Hong Kong equity and property markets. This could, at least in part, explain the unexpected price surge in both markets.

Looking forward, the second half of 2009 may witness the battle of the bulls and the bears. The bulls are citing as their support the Central government’s continuing stimulus packages and positive signs in China’s economy. The bears find justifications in softening rentals, weak local and global economies. We still maintain the view that if rentals do not stop sliding, the sale price hike will not sustain.

By K.S. Koh