Friday, January 23, 2009

Scarcity of motivated vendors

The property market has retreated by anywhere between 25% and 30% since the first quarter of 2008 (depending on which sector of the market you are looking at). The local stock market has retreated even more (down by more than 50% from its high). Rents are also coming under pressure and falling. With every pundit and analyst in town forecasting lower prices, I decided it would be a good time to take a look at some properties.

After looking at a number of properties in the Mid-levels, I was struck by a number of factors:

1. rents have declined only a little less than capital values - yield expansion has been very limited (and I suspect that whatever yield expansion has taken place will be offset by longer vacancy periods);

2. genuine vendors are willing to accept some discount to their asking prices - but not much. This is an improvement over the common experience of raising asking prices the moment you expressed an interest in a property;

3. bait and switch advertising is all too common. A property will be advertised at a low price but when you ask to see the property, the agent will say that the vendor is not serious and show you a similar property at a higher price;

4. there are still plenty of owners in fantasy land asking prices which are at or above last year's highs;

5. motivated vendors are scarce. I hope that this will change as leases expire and vacancy rates increase and rental levels fall below the previous levels. Given the very low interest rates and the abundance of liquidity in Hong Kong, this may take a while.

It is still very much a buyer's market and I am in no hurry to buy anything unless is is a very good deal.


James Wan said...

My analysis of what happened between November 2008 to March 2009 is:

1) Most landlords were willing to leave their property vacant than to get a tenant for low rent. The holding costs were low for landlords since interest rates had dropped dramatically.

2) You had to look hard for vendors who were really in a bind or who made emotional decisions. Alot of time wasted going from property to property.

3) I try and avoid agents at all costs. Not only is their 1% commission a complete waste of money for the "service", they provide but the bait and switch is damn well annoying. You can find owner listings on certain web sites. Cut out the middleman and I think its better for both parties cost-wise and time-wise.

4) Definitely agreed. The fantasy will be over once prices start to crash and interest rates move up and therefore they will soon discover a dearth of tenants willing to pay high rents.

5) Unless the HK economy picks up again, the finance industry employees will not return in droves to pay those exorbitant rents to the landlords in mid-levels, West Kowloon area, etc.

It seems that developers are reaping major benefits as their new developments seem to be selling out on the first day of public viewing.

When people are all rushing one way, I have found it wise to take a step back and make sense of it all. If it doesn't smell right, then over time, it turns out to be the right thing to not to anything and wait it out. HK is a gambler's mentality and a lack of fear in the market means prices are propelling endlessly upwards.

traineeinvestor said...

Hi James

Once again, thanks for dropping by and leaving a comment. To respond to your points:

1. I guess I am an unusual landlord. I would rather keep a flat occupied at a lower rental than vacant while I hold out for a higher rental.

2. The only motivated vendors I managed to find were unable to provide good title (HK has a ridiculous land title system). I passed on these properties.

3. I use one agent whom I have developed a relationship with over about a decade now. I get a discount on the 1% and he arranges for all the maintenance on my properties without charge (I only pay the guy who does the repairs) and will chase tenants who fall into arrears (also without charge).
I work in a job which requires very very long hours. I have relatively little time to spend looking at properties. The agent knows my criteria and does not waste my time with non-conforming properties.

4. I got that wrong. The market has risen strongly since I wrote the post back in January. I do agree that when (not if) interest rates start to rise the property market will be at risk of a meaningful decline in prices.

5. I do not know what the overall vacancy rate is, but I have had no problems in finding tenants. Most financial institutions have increased headcount in the last three months.

6. The developers are doing well at the moment - both in HK and in China.

7. At some point the market will experience price declines. I have no idea when that will happen or what prices will do between now and whenever that decline commences. Opinion among experts is usually divided - making it rather pointless relying on them.


James Wan said...

Hi TraineeInvestor

I have been trying to track the overall HK property market, look for early indicators of bullish behaviour or possible early warnings of overheating and price collapse.

This is my chart:

1) I think your approach is logical so long as the tenant is a good one. Leaving a property vacant makes no sense to me. Collecting some rent from a good tenant is better than collecting none at all.

2) Conveyancing in HK is not straightforward I agree. Especially with the older apartments and properties.

3) That's great. Do you mind sharing the details of this rare gem of an agent? :)

4) For a time, the market rose but transaction volume was falling. This looked like a false dawn. But now price is rising as well as volume which seems to confirm a full fledged rebound.

5) I am unaware of this, but I am still searching for a reliable data source (e.g. immigration department statistics) so I can track the numbers of work visas issued month to month.

traineeinvestor said...

Hi James

I'd prefer not to disclose the name of the agent - he works for himself (his own small agency) and there is too much risk that he would draw a link back to my blog.

On the hiring, the evidence in largely from discussions with people in the industry. A number of banks shed staff in 2008 and early 2009 and now need more staff for the resurgent IPO market and other business areas. Some banks did some opportunistic hiring from competitors who received bail out money and were subsequently restricted from paying large bonuses. The latter does not affect the number of people employed but it does sometimes leave the banks that lost people for that reason needing to hire replacements.