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To: ms.smartest.person who wrote (1464)	6/21/2001 10:44:31 AM
From: ms.smartest.person	Read Replies (1) \| Respond to of 2248

THE LURE OF PROPERTY This might be of interest if Hutch uses ICG Asia for property quamnet.com It cannot be helped; the time has come, yet again, to talk about the property market and property stocks. I do so with some diffidence because the subject of property is very well aired on Quamnet and elsewhere for that matter but it is impossible to get away from the fact that for all the talk of how the Hong Kong stock market has freed itself from excessive dependence on the property sector, it is still the overwhelming force in the market. It does not however follow that the same factors which make physical property a good buy, make a compelling case for purchasing property stocks. A recent research report from Morgan Stanley Dean Witter (MSDW) highlights a host of reasons as to why property is a good buy. It does not say so but the case for property purchase is particularly strong for end users as opposed to investors. I happen to think that there is almost always a good case for end users buying property, because unlike most investments it has a useful value even when the asset value is in jeopardy. Moreover, as MSDW has found, property prices tend to outstrip inflation over the long term. Examining price trends over the last two decades shows that property prices have risen by an average of 8 per cent above inflation. Therefore as a hedge against inflation, not even considering the prospect of capital accumulation, property has proved itself to be prudent investment. It is hard to argue against an investment which puts a roof over your head, particularly when prices have fallen to such a degree that property is unusually affordable. MSDW says that affordability is 'as good as it has been at any time in the past 30 years. It doesn't get much better than this, but probably is going to do so in the coming month or two, as we expect US interests to take a bit more of a leg down'. The crucial point arising from MSDW's research is that the cost of borrowing for mass market housing is now below the cost of renting. In summary they have found that the average cost of funding a mortgage is 4 per while the average rental yield on a property is 5 per cent. In reality borrowing rates are very high given that Hong Kong is experiencing negative inflation. It is not like the good old days of the late 1980s when it was possible to borrow money at below inflation rates although the actual cost of borrowing was at double-digit levels. Now banks are hard pushed to get people to borrow, even though interest rates are coming down. This has more to do with sentiment than anything else. Potential property buyers feel insecure. They do not want to commit themselves to large borrowings when their jobs and businesses appear to be unstable. This makes for an unusual state of affairs in the property market because a combination of falling interest rates and greatly improved affordability usually produces sharp upward movement in property prices. Add to this a conservative policy of land sales keeping a cap on the supply of property developments. You may therefore assume that the likelihood of sharp price increases should be guaranteed. However not only has this not happened, but most analysts expect nothing of the kind to happen in the near future. This helps explain why property stocks continue to trade on modest price earnings ratios; indeed many of these stocks are trading at levels close to net asset value. Although this may make property stocks appear to be attractive, they also appear to be highly vulnerable to negative sentiment, indicating an unwillingness to see the underlying strengths they may possess. Logic suggests that the case for buying property is the same as that for buying property stocks. However most property stocks are trading towards their high point in a twelve month period whereas physical property prices are at historic lows by most measures. The fact that banks are desperate to lend money to finance property purchases adds to the lure of the property market. The timing may not be perfect for an investment in property but seekers of perfection are doomed to spend a great deal of time on the sidelines and miss many opportunities. However there is also risk in property investment, just as there is risk in practically all types of investment. The risk is diminished for end users. History looks kindly on investors in Hong Kong property who have not over extended themselves to make this investment. Current conditions suggest otherwise but over time property investments in Hong Kong always come out well. As I write these words, I think of my first and only Hong Kong landlord. He purchased some small village plots during the 1950s when the economy was in dire straits. He did not have much money and was considered foolish for buying up useless land. He is now, of course, a millionaire many times over.