February 4, 2016

Is Hong Kong’s Property Market Coming off the Boil?

With Hong Kong seeing a 25-year low in January, Peter sits down on CNBC to talk about property in Hong Kong and across Asia. What’s in the future for Hong Kong residential prices, how does it compare with China and Singapore, and why isn’t Peter as down on Hong Kong property stocks as everyone else?

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Pauline Chiou: In the meantime, let’s move on to another story that we’ve been following, specifically out of Hong Kong and the property market there. Because the froth seems to be coming off of Hong Kong’s property market, sales in January were at their lowest for that month since 1991. Developers are expected to continue slashing home prices, amid bearish sentiment. So what is going on with the property market in Hong Kong and broadly in Asia? Peter Churchouse is author of The Churchouse Letter, he joins us live from Hong Kong. Peter, the lowest number of sales in 25 years in Hong Kong, I thought this bubble would never burst. Is this just the beginning or is there worse to come?

Peter Churchouse: Well basically this is the product of a series of domestic issues and also macro issues. Hong Kong was a big beneficiary of the easy monetary policy that flowed out of the GFC and we saw bubble conditions in property markets in Hong Kong and pretty much most countries around the region. And countries put in all sorts of policies to try and curb those bubbles. Well those policies are now working, we have huge stamp duties and all sorts of disincentives to buy property in Hong Kong, and Singapore, Taiwan and so on, and now these measures are coming home to roost and we’re starting to see the property markets crack. Hong Kong’s down about, nearly 10% since it’s peak in August, September and I expect fully that we’ll see another 15% or so over the next 12 months decline, as we’re seeing also in Singapore, Taipei and other countries around the region.

Pauline: Okay, so you see a mirror image happening in terms of what’s happening with the property market, because Singapore also has an oversupply issue, as does China. Do you see any differences in any of these markets or are they pretty much following the same path?

Peter: They are following very much the same path, the only difference is really that China has rolled back the property cooling measures over the course of the last couple years, but Hong Kong, Singapore and Taiwan have not rolled back those cooling measures and as the markets correct over the course of the next 12 months, I fully expect to see the governments of Hong Kong and Singapore basically start to roll back those tightening measures that they put in place a couple of years ago and reducing those heavy stamp duties and disincentives to own property. But that’s probably something we’ll see coming out of the policy directives over the course of the next 8 or 9 months.

Pauline: Yeah, in fact Peter, we saw China announcing that they’re rolling back some of those measures, in fact they’re easing up the down payment requirements for first and second time home buyers, but will these measures actually help to soak up all of that inventory there in China?

Peter: Well it has been happening. Over the course of the last 12 months you were seeing, about a year ago, every single major city in China was showing negative month-on-month, year-on-year price movements. Today, just over half of those major cities, we’re seeing month-on-month increases in property prices. Particularly in the Tier One and Tier Two cities. But you’re right, there is a massive inventory overhang, particularly in Tier Three and Tier Four cities which is going to take, probably one to two years to absorb, even in a good market. But in cities like Shanghai, and Shenzhen, Guangzhou, Beijing, these markets are very, very strong and in fact, Shenzhen was up around 30-40% last year. So it’s really a two speed market in China.

Pauline: A two speed market. Okay, and Peter from an investors point of view, when you look at some of the property stocks, developer stocks, in your mind who is still in a healthy position even though we’re seeing this steep decline in property sales?

Peter: Oh yes, absolutely when I look at property stocks in Hong Kong the market’s almost treating them as distressed assets. And these companies are no way in the world distressed. I mean, a company like Sun Hung Kai Properties for example, it’s the third or fourth biggest property company in the world, it’s gearing is about 10%, which is way lower than any where else in the developed world, it’s trading at about 55% discount to it’s underlying net asset value, these companies are trading at 1 and 2 standard deviations below their long term average, as if they’re going to go bankrupt, and there’s no way that’s going to happen. So, I think you’re gonna start to see people picking away at these stocks over the course of the next few months because they’re inordinately cheap right now.

Pauline: Okay, so they could scoop up these value plays. Alright Peter, great talking to you. Thank you so much, that’s Peter Churchouse there talking about the Hong Kong property market, the China market as well as Singapore.

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