Peter's Perspective
1st April 2015 by Peter Churchouse

You Choose. Proper(ty) Profits or an Auto Wreck.

I’ve never bought a brand new car.

The first car I ever owned was a 1937 Ford Prefect.

It was second hand (obviously!).

Peter's first car, a 1937 Ford Prefect.

One of the next cars I owned was an old VW Combi purchased upon arrival in Port Elizabeth, South Africa in 1973. It was a bit banged up for sure, but it safely carried my wife and I the length of the African continent.

I sold it for roughly what I paid for it.

Over the years I’ve owned Toyotas, BMW’s, Mercedes, and even an Alfa Romeo at one point. None of them particularly memorable rides.

And last week I bought a 10 year old Jaguar…

I paid HK$50,000 or roughly US$6,500 for it. Now that might sound like a lot of money to readers in the U.S. or Europe, but in Hong Kong that’s not a lot of money for a 3 litre V6 XJ6.

Why? Because the taxation on brand new cars here is huge.

The table below gives you an idea of how the increasing taxes stack up.

Hong Kong Car First Registration Tax.

So for a US$100,000 car (manufacturer price), you’d be looking at a total price of US$188,675 to drive it off the showroom floor after taxes.

This means of course that the second hand market reflects these initial costs and hence overall car costs in this part of the world are pretty high. Singapore is even worse but that’s a different story.

What’s the point I’m getting at here? Well, according to the registration document this Jaguar, the first owner paid HK$750,000 for this car back in 2005.

That’s roughly US$100,000.

And I just paid nearly 94% less than the original purchase price.

The return on investment for the original buyer here works out to minus 23.72% p.a. on an annualized basis (that’s ignoring every other cost associated here).

So, buying brand new cars in Hong Kong (or elsewhere for that matter) isn’t likely to be particularly lucractive. You probably already know that.

But here’s the other side to this story…

In early 2006, a few months after the original car owner in question bought his Jag, I bought a small investment property here in Hong Kong.

I paid approximately HK$1.4 million (US$180,000) for a little one bedroom walk-up flat with roof in Central, Hong Kong.

It ticked all the boxes I talk about in my guide to buying investment real estate: it was a location where people where a suit and tie to work. I could add value through a very basic renovation.

I took a 50% mortgage. So my down payment after stamp duties etc.. was roughly HK$750,000… the same as the new 2005 Jag.

The rent covered the mortgage easily. There was a little renovation cost as well.

Now, I could just as easily have bought myself a brand new Jag… No doubt I would have enjoyed it a bit more than whatever old car I was driving at the time.

Instead I put a down payment on a little investment property.

A little under 2 years ago, my son and colleague Tama negotiated the sale of that property for HK$7 million (and struck a deal with the purchaser that we would continue to receive all rent generated for the next 2 years).

Purchased in 2006 for HK$1.4 million, sold in 2013 for $7 million (plus the 2 years of rent).

I don’t write this to brag. There was no doubt some luck involved (the buyer was highly “motivated”). But that’s not the point, the property market was up 2 – 3 times anyway…

My point is that these days in Hong Kong I see a lot of nice cars around. And more often than not, it’s a young guy behind the wheel.

We’re all adults and free to do what we like with our money.

I’m in no position to lecture… my boat is my expensive vice!

If fast cars and fancy watches is what you want then great, it’s your call.

But I can’t help but wonder if some people wouldn’t be doing themselves a favour by just leaving the Porsche in the showroom.

Maybe look at a better use for that hard-earned capital… put their money to work for them.

The moral of the story? When it comes to the big ticket items, don’t just buy… Invest.

You’ll get far better mileage…

Good investing,

Peter

P.S. In this month’s upcoming edition of The Churchouse Letter (published later this week) we look at a country that flies under the radar of most international investors and offers up some simple nice yielding investment opportunities that I don’t see anywhere else in the world right now.

P.P.S. Although greatly oversimplified, this is the outcome of choosing to spend HK$750,000 differently…

Value over time between a Car and piece of Property from 2006-2015.


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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