Thursday, January 31, 2008

Thank You Mr Bernanke

Hong Kong banks cut interest rates today following the reduction in interest rates by the United States Federal Reserve. It was slightly disappointing that the banks only cut their lending and deposit rates by 25 basis points compared to the 50 basis point cuts by the Federal Reserve and the Hong Kong Monetary Authority.

To some extent the more limited interest rate cut in Hong Kong reflects the fact that interest rates in Hong Kong are already very low (due to the very high level of liquidity in the Hong Kong economy). With deposit rates for small deposits and short term deposits getting close to zero, it is simply not possible to cut deposit rates much further for call and short term deposits. The banks would suffer reduced margins if they cut lending rates by more than the reduction in deposit rates. Since many deposit rates simply cannot get much lower, this makes the banks reluctant to cut lending rates.

In any case, the effect of the successive interest rate cuts mean that over the last 14 months the average interest rate on my loans has fallen from a little bit over 5% to about 3% (or a little less). For a property investor who uses leverage this represents a significant increase in cash flow and profitability. The cash flow should improve even further as leases fall due for renewal, giving me an opportunity to adjust rents upwards in line with the market. Unfortunately, I think only two of my leases will expire in 2008 and both towards year end (I should check this).

The equity parts of the portfolio may be hurting at the moment but the properties are doing very nicely, thank you.

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