Speculators may switch to office sector

HONG KONG: Hit by higher stamp duties levied on housing gains, some speculators may now decide to focus on short-term trades in the office and commercial markets — a response that could throw into doubt the government's strategy to cool property prices.

While accepting that the stamp duties on quick resales introduced last week will slow the residential sector in the near term, investors and analysts believe capital will continue to flow into Hong Kong and property will remain a desired asset class.

"Liquidity is the fundamental that the government cannot change," said Goodwin Gaw, the founder of Gaw Capital, which oversees private equity funds of more than US$1 billion (RM3.13 billion). Given the ongoing strong liquidity, strata-title grade A office properties would be in favour in the short term since gains made on these investments will not be subjected to the additional stamp duty imposed on housing, Gaw said.

The government last Friday, Nov 19 announced it would levy an additional stamp duty on resale properties held for less than two years, with rates varying from 5% to 15% of property values, depending on the holding period. This is in addition to the current stamp duty, capped at 4.25%.

The Hong Kong Monetary Authority also lowered maximum loan-to-valuation ratios for residential, non-residential and property under company names.

The measures have had an immediate impact on demand, with transactions of secondary-market homes in 10 major housing estates falling nearly 80% to just 14 completed deals at the weekend. In some popular estates, such as Taikoo Shing, Kornhill and South Horizons, there were no deals done at all.

Gaw said investors were likely to pause and rethink their strategies. Some funds would turn their attention to the office sector where price gains have lagged compared with luxury homes, he said.

According to international property consultant Jones Lang LaSalle, prices of luxury residential homes — which they define as properties with a saleable area of 1,722 square feet or more — are now about 26% above their last peak in 1997. But office prices are still 4% below their historical peak reached in 1994.

Concerns about the risk of price inflation of commercial properties were raised in a Legislative Council panel meeting on the new anti-speculative measures on Monday. Civic Party lawmaker Ronny Tong Ka-wah warned that the regulations might drive speculators from the residential market to commercial flats. "As commercial properties are not included in the new policies, now speculators will turn to this market and push up prices and rents," Tong said. "This will then cause serious inflation."

The government's move on stamp duties is seen as a bid to prevent property price inflation arising from an increase of liquidity after the US Federal Reserve's decision to pump US$600 billion into the US financial system — the so-called second round of quantitative easing.

Arising from the US measure, increased liquidity is expected to flow into emerging markets such as Hong Kong where the economic outlook is favourable, creating pressure on exchange rates, consumer price inflation and asset prices.

"The situation is that every country is now trying to devise measures to pass the liquidity on to the others so as to avoid a full-blown asset-price bubble," said Lee Wee Liat, regional head of property research at Samsung Securities. The measures reflected the Hong Kong government's determination to cool home prices, Lee said, and in response some investors would likely opt for investing in offices and commercial properties.

But in the longer term, agreed analysts, housing would remain the preferred target of investors due to low interest rates and strong demand from domestic and mainland buyers.

"Investors have a surfeit of capital and it needs to go somewhere. With interest rates so low relative to growth domestic product, investors are incentivised to invest their money and to borrow," said Adam Fisher, managing director of Commonwealth Opportunity Capital, a hedge fund based in California. "There are not a lot of good choices for capital and so property will remain a desired asset class."

While some capital would now flow into the commercial market, the residential sector, with its bigger supply, would remain the main target for investment in the longer term.

"I do not see the dynamic of cheap capital in the US changing any time soon and thus the backdrop in Hong Kong will likely favour property for longer than some may expect," Fisher said.

Investor Jacinto Tong, chief executive at property investing firm Gale Well, believed many investors may prefer to wait for bargains in the housing market. His firm has more than HK$1 billion (RM403.62 million) in cash, but he has no immediate plans to buy property.

Veteran investor Lai Ni-jan is cautious on new property investment. "I will have to observe the market for a while before I make any decision. The outlook is not clear enough and I won't buy property temporarily unless the price is very attractive."

Instead, Lai, who has increased his investment in the stock market and the yuan in the past six months, said he would continue to increase the investment in these two areas.

Chung On-chu, the president of China Yu Lee Holdings and the owner of eight residential flats in Hong Kong and more than 10 flats on the mainland, said he would only buy if prices dropped more than 20%. "If you have excess money, it would be better to invest in the property market rather than save it in a bank account," he said. — South China Morning Post