Sunday, July 25, 2010

The consumer is alive and well

At least in Asia that is. In spite of all the negativity being produced in America and Western Europe, the global credit crisis has been something of a non-event in Asia. In fact, it has been a trivial thing compared to the Asian crisis in 1997 and SARS in 2003.

Three pieces of anecdotal evidence:

1. wine: prices for en primeur wine reached record levels this year. Prices for older vintages have also advanced - a lot. Unfortunately, many of the wines I would once have liked to buy for personal consumption have now reached the point were it is impossible to justify purchasing with a view to drinking them. This would not have happened if not for the Asian driven demand.

2. air tickets: prices for air tickets (especially in business class) have continued to rise. Also, availability in any class is not always a given, especially around peak holiday periods and for some of the more popular flights into China.

3. consumer discretionary: if the queues for the ipad (released in Hong Kong on Friday) were not evidence enough, the results from retail chains in Hong Kong and China have been impressive. A reflection of the rise of the middle class and their confidence in the future (worried people spend less, not more).

4. real estate: residential real estate prices continue to rise in Hong Kong and in China (in spite of cooling off measures in China) as people use their rising incomes to upgrade their homes.

While the world is still an interconnected place, the arguments for their being at least a degree of economic independence from America are looking stronger by the day.

Thursday, July 15, 2010

A potential opportunity

Hong Kong real estate is our largest asset class (by a considerable margin). All but one of those Hong Kong properties is residential. The one exception is a retail shop in a suburban area which is leased to a multinational. The retail shop is one of two shops in the ground floor of a residential apartment building (which is fairly common in Hong Kong). So far, it has been an excellent investment both in terms of capital appreciation and in providing a steady cash flow.

The other retail shop in the building is now for sale with vacant possession. As a stand alone investment the asking price is probably in line with recent sales in comparable properties as is the projected 3.5% net yield on gross cost. (I've found it harder to get comparable rental data so do not know whether the projected rental is a realistic assessment or not and have discounted the agent's projection by 10%.) From an investment perspective, this is not exciting.

The first interesting aspect is that we already own the adjoining shop in the same building. This gives us the option (when both shops are vacant) of combining the two properties for a single tenant or continuing to rent them separately. While that flexibility has its attractions, in that neighbourhood it is difficult to see anything other than a restaurant or a bank branch needing the bigger space. Accordingly, I attach no value to the possibility of combining the two properties (unlike the real estate agent).

The second interesting aspect is that the asking price and the projected rent give us something to benchmark or existing property against. All I can say is that I am really looking forward to the lease coming up for renewal next year.

I've concluded that it's the wrong property for us as it concentrates risk and won't be putting an offer in. That said, I would prefer that (absent a very compelling valuation) future additions to the portfolio be outside the residential sector.

Monday, July 05, 2010

Monthly Review - June 2010

June was a very average month for financial progress with limited gains on the equity portfolio and positive cash flow on my properties being largely offset by adverse currency movements and declines in commodity values. A reasonable savings rate was achieved.

Here are the details:

1. my Hong Kong equity portfolio appreciated marginally. There was one trade this month with GDI being added to the portfolio

2. my ETFs moved in line with their respective markets to record very modest gains (Hong Kong, Russia, Taiwan and India)

3. my commodities all declined (ETF, silver, HOGS, NICK)

4. all of my properties are let producing a positive cash flow and making a positive contribution to my net worth. I had one repair bill due (a leak in the kitchen)

5. currency movements were adverse, largely due to a weakening of the AUD

6. no ELDs were entered into this month. Having used these instruments for 18 months, I have concluded that they have (at best) a limited role to play in the portfolio

7. savings were positive with income being average and expenses coming in at below expectations

My low cash position has improved (even allowing for the GDI investment this month) but is still quite low.

For the month, net worth increased 0.98. The year to date increase is 5.9%.

While the losses in May were a blow, the overall result for the half year (5.9%) still leaves me on track to achieve my retirement number sometime between the end of 2011 and the end of 2013.

Interest rates rising

After a long period of flat lining at very low levels, HIBOR interest rates have risen. This has the effect of raising interest rates on new and existing mortgages. Given that most HIBOR based mortgages are based on either 1 month or 3 month HIBOR (i.e. they are floating rate mortgages), this means a near immediate increase in the interest rates payable on these mortgages. There has been no effect on on the more expensive prime-linked mortgages.

In practical terms, all of our mortgages are HIBOR linked and the latest round of resets has seen the rates we are paying increase from a range of (around) 0.7-0.9% to (around) 0.9 - 1.2%. By any standards these are still very low rates and do not even come close to reversing our monthly cash surplus on our investment properties.

The open point is whether the increases are a response to rising short term rates in other markets or a more specific local response to the amount of money being tied up in applications for shares in Agricultural Bank of China's initial public offer. If the latter, there should be a decline in HIBOR after the refund cheques are issued.