A Private Portfolio

China Blue Chemical purchased

noreply@blogger.com (traineeinvestor) — Tue, 22 May 2012 08:12:00 +0000

I have added a few more shares of China Blue Chemical (HK:3983) to the portfolio. The company offers an acceptable yield of 3.7%, is expanding its business, is expected to benefit from better pricing (although this may be limited due to price controls) and has a very solid balance sheet with RMB2.8 billion in cash and deposits as at the last balance date.

I paid HK$5.22 per share.

AUD/HKD FX contract opened

noreply@blogger.com (traineeinvestor) — Fri, 18 May 2012 04:09:00 +0000

I have been wanting to have a little more money invested in Australia and New Zealand - the objective is to have enough assets allocated to AU/NZ to effectively pay for the accommodation and other living costs incurred should I choose to spend two or three months a year in those countries.

With both currencies having weakened considerably in recent weeks (thanks Greece/Euro zone politicians), I've decided to move some money offshore. Rather than simply convert and remit, I entered into a forward contract to try and profit from the current market volatility.

Here are the details:

Expiry date: 29 May, 2012
Fixing date: 25 May, 2012
Spot rate: 7.6560
Conversion rate: 7.600

If the AUD is at or below 7.600 on 25 May, I will be buying AUD at an effective exchange rate of 6.585. If the AUD is above 7.600, I will pocket the premium which is about what I would earn on the sum in question over a 12 month period (because the bank deposit rates are so low).

Financial repression for the long term?

noreply@blogger.com (traineeinvestor) — Fri, 18 May 2012 01:51:00 +0000

While much of the world's economic attention is on Greece and the country's possible/likely/inevitable exit from the failed Euro experiment, it's worth remembering that many of the world's developed countries continue to run deficits at levels which can only be labelled as fiscally unsustainable - Japan, the United States and most of Western Europe come to mind.

Given that the ruling politicians and the entitlement classes that they are beholden to are unlikely to ever make the cuts needed bring their out of control spending down to sustainable levels it seems quite possible that financial repression in the form of negative real interest rates may well be with us for quite some time. In effect the central banks will (i) keep interest rates nominally low not just in an attempt to stimulate the economy but because the debt burden is so high that higher nominal rates could easily become unsustainable and (ii) keep pumping in money to keep official inflation at a positive number to gradually erode the real value of their debts.

If this logic proves to be correct then borrowing to invest in real assets which have sustainable yields which are higher than the cost of funding is the best strategy for the longer term - inflation should eventually push the value of the asset and its income stream up while the nominal value of the debt remains unchanged. Of course there is a lot of short term between now and the longer term and individual assets and whole asset classes can, and often do, fluctuate wildly in value meaning both that the strategy is not for the faint of heart and that considerable safety margin needs to be maintained.

This makes a pretty good case for not paying of mortgages early. In fact, I am considering going further and borrowing to buy another small flat in Hong Kong in the middle of next year. One of my mortgages will have been completely amortised by then and I will be able to offer both the existing property and the new property as collateral and the combined rental income will comfortable exceed the mortgage payment on the new flat. Of course, I will still need to get over the hurdle of whether the bank will lend to me when I no longer have any employment related income.

Sinopec purchased

noreply@blogger.com (traineeinvestor) — Thu, 17 May 2012 01:45:00 +0000

This morning I added a few more shares in Sinopec (HK:386) to the portfolio. The company offers are 5.1% dividend yield with moderate prospects for longer term growth (in spite of China's regulatory controls adversely affecting refining margins).

I paid HK$7.20 per share.

The Euro and reality

noreply@blogger.com (traineeinvestor) — Thu, 17 May 2012 01:05:00 +0000

The soap opera of the Euro continues to make headlines and drag markets down.

Exactly why anyone would be surprised by the Euro zone's woes is completely beyond me. At the end of the the day the Euro is/was founded on the belief that a group of countries which had long term track records of continually spending more than they take in and increasing their national debt would suddenly become more fiscally responsible if the market imposed sanction of a currency market were taken away from them and they were given the freedom to borrow more money at lower interest rates.

On planet earth we call that enabling behaviour. In the Euro zone it's called monetary policy.

While the losses to the portfolio in recent weeks have more or less unwound the gains made earlier this year, given that I am still a net accumulator of assets (at least for another 7-12 months), I suppose I should be celebrating the opportunity to buy at lower prices. Somehow, I am struggling to do that.

Henderson Land purchased

noreply@blogger.com (traineeinvestor) — Fri, 11 May 2012 03:42:00 +0000

Henderson Land's (HK:12) share price droped below HK$40 this morning. Given the size of the discount to NAV, the Chairman's recent purchases, expectations for its development pipeline and the size of its land bank, I find the shares attractive (although the 2.5% yield is not exciting) and have added them to the portfolio. This position taken is a large one and will make Henderson one of my top ten individual equities.

I paid HK$39.80 per share.

Portfolio top ups

noreply@blogger.com (traineeinvestor) — Wed, 09 May 2012 02:16:00 +0000

In what is so far prooving to be an exercise in catching falling knives, I placed a series of buy orders to add small quantities of additional shares to some of my existing positions. So far the following have been filled:

Hang Seng Bank (HK:11): at HK$106.00. Essentially buying for yield
VoDone (HK:82): at HK$0.94. Buying at about the recent placement price
COSCO Pacific (HK:1199): at HK$10.36. Another yield play
VTech (HK:303) at HK$86.10. A high yielding exposure to China's growing consumer sector

So far it's looking pretty ugly.

I have outstanding buy orders in on a few other stocks which are being sold off.

Hong Kong property prices - still strong

noreply@blogger.com (traineeinvestor) — Sat, 05 May 2012 07:08:00 +0000

Having been listening to calls that Hong Kong's property market is a bubble which is about to burst for a few years now, it was both amusing and pleasing to see that the on line valuations posted by some of the banks in Hong Kong have recently been revised upwards. I have previously pointed out that, while the Hong Kong property market is expensive and it is very hard to justify buying properties for yield, it does not possess any of the characteristics of a bubble. That said, I still regard the market as being too expensive and had been expecting prices to decline.

In any event, the new valuations have pushed our household's net worth to an all time high (the previous high was set in February this year). For most of our properties, the revised valuations represent a new high water mark. While this has no bearing on either the cash flow which will fund living expenses after I retire) or my retirement plans generally, it is a nice feeling but somewhat tinged with regret that we did not add to the portfolio in 2010 or early 2011.

Vietnam ETF purchased

noreply@blogger.com (traineeinvestor) — Fri, 04 May 2012 01:40:00 +0000

Yesterday I purchased a few more units in the Vietnam ETF (HK:3087). The reasoning remains much the same as for my previous purchases - belief that the market will grow due to a combination of deregulation, better inflation control, favourable demographics and foreign investment.

I paid HKD201.00 per unit.

Sino Oil & Gas - partial sale

noreply@blogger.com (traineeinvestor) — Wed, 02 May 2012 03:37:00 +0000

This morning I sold some of my shares in Sino Oil & Gas (HK:702).

This is the worst investment in the portfolio by a considerable margin. The sale price of HK$0.193 represents a loss of nearly 53% against my average purchase price. As an exercise in naval gazing, I will spend some time revisiting both the decision to get into this investment and the failure to sell much sooner. As a starting point, while I expect any portfolio to have winners and losers (in both absolute and relative terms), the real problem with this one was that there was not enough clarity on the future earnings stream. As one commentator pointed out there was also an excessive amount of options being granted to management which is never a good sign for investors.

The sale proceeds were reinvested in BCIA (HK694) as reported in my previous post.

BCIA purchased

noreply@blogger.com (traineeinvestor) — Wed, 02 May 2012 03:30:00 +0000

This morning I added a few more shares in Beijing Capital International Airport (HK:694) to the portfolio. In spite of the recent run up in the share price, the stock still looks reasonably attractive as a long term investment.

I paid HK$5.00 for the additional shares.

Monthly Review - April 2012

noreply@blogger.com (traineeinvestor) — Mon, 30 Apr 2012 08:29:00 +0000

April saw relatively little change in the value of the portfolio with small declines in the value of equities and commodities being partially offset by the cash flow from the properties. FX movements were negligible. Savings for the month were also trivial due to a combination of low income and spending on a family holiday.

Here are the details:

1. my Hong Kong equity portfolio fell slightly. I purchased shares in Fairwood, Cosco Pacific and NWS Holdings. I sold my small position in Tai Sang Land;

2. my AU/NZ equities were marginally higher;

3.my ETFs fell in slightly line with the local markets, with all being negative;

4. my commodities fell slightly, led by silver;

5. all of my properties were occupied with all tenants paying on time. There were no repair bills at all this month (although I will have a couple of minor ones in May);

6. currency movements were almost non-existent, as the NZD and AUD were flat against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month. I would like to add some more bonds to the portfolio but am finding direct purchases of bonds through the banks I have accounts with to be something of an exercise in frustration in Hong Kong;

8. I had no open derivative positions;

9. savings were very minor due to a combination of low income (April is usually the second lowest month of the year) and high expenses (paying for the balance of our annual holiday in April and the premium on our annual medical insurance which ended up hitting the bank account in April instead of March as I had anticipated).

My cash position declined due slightly to new investments. I currently hold 48.5 months of expenses in HKD cash or equivalents. This is more than enough - in fact it is too high given current inflation levels and the near zero nominal yields on bank deposits.

For the month, my net worth fell by 0.2%. The year to date increase is 13.75%. The year is off to a good start and I remain on track to retire at the end of 2012.

Fairwood purchased

noreply@blogger.com (traineeinvestor) — Mon, 30 Apr 2012 06:59:00 +0000

Today I added a few more shares to my position in Fairwood Holding (HK:52). The fast food company has done a good job in expanding at a sensible pace in the face of rising rents and rising labour costs. The shares offer a trailing yield of 5.5% which is attractive and, I hope, something that has the potential to grow over time.

I paid HK$13.10 for the additional shares.

Book Review: The Power of Habit

noreply@blogger.com (traineeinvestor) — Sat, 28 Apr 2012 09:59:00 +0000

It has often been said that we are all creatures of habit. Charles Duhigg's book "The Power of Habit: Why we do what we do in life and business" explores the nature of our habits, the benefits and problems with habits and how to either change or develop them.

He begins by exploring how habits work in individuals and why they can be good things in that habits enable us to get things done with minimal effort. He then looks at how people can go about creating new habits or changing old ones. It was this part of the book which I found to be both most interesting and practical. The explanation of how the "cue - habit - reward" loop works on the brain and case studies on techniques to break it was clear, easy to follow and practical. I ended up taking a look at some of my own habits (bad ones according to mrs traineeinvestor), picked one and am attempting to use what I picked up in this book to change it. The possibilities of helping my children to form better habits has also occurred to me.

The second part of the book looks at the habits of organisations including case studies from Alcoa and Starbucks. These were interesting but of less practical use given the proximity off my retirement.

Part three looks at changes in society, drawing on examples from the civil rights movement and an American church group. It also considers the question of free will and personal responsibility for our habits.

The apendix entitled "a reader's guide to using these ideas" was useful but didn't really add anything to what had been covered in part one.

Overall, I found The Power of Habit to be one of the best self help books I have read. Highly recommended.

Cosco Pacifc purchased

noreply@blogger.com (traineeinvestor) — Fri, 27 Apr 2012 08:06:00 +0000

In an effort to "buy the dips" and reduce the amount of cash being held, I put in a few orders to buy small quantities of additional shares in some of the companies already in the portfolio at below the prevailing market prices. This afternoon, I got hit on one of those orders and purchased some additional shares in COSCO Pacific (HK:1199) at $11.10 per share.

Having gone through the most recent result, I am happy holding this company for the longer term.

Tai Sang Land sold/NWS Holdings purchased

noreply@blogger.com (traineeinvestor) — Fri, 27 Apr 2012 04:08:00 +0000

As part of my efforts to remove "too small to justify the time spent on them" positions from the portfolio, I have sold my shares in Tai Sang Land (HK:89) for HK$3.00 per share. While Tai Sang Land still sells at a substantial discount to NAV (as do most property companies in Hong Kong), I couldn't see myself adding to the position and decided to sell. I took a loss of 8% (net of expenses and dividends) on the investment.

The sale proceeds have been reinvested in NWS Holdings Limited (HK:659) which is now one of my top ten shareholdings. I paid HK$11.70 for the additional shares.

Risks of not making early mortgage payments #2

noreply@blogger.com (traineeinvestor) — Wed, 25 Apr 2012 10:30:00 +0000

As a follow up to my recent post on the risks of not making early mortgage repayments I ran a more detailed sensitivity analysis and came away with the following:

the Hong Kong investment properties will still be cash flow positive if rents drop by up to 14%
the Hong Kong investment properties will still be cash flow positive if interest rates increase from the current average of around 1% pa to around 3% pa

The analysis assumed a standard 12% allowance for repairs, maintenance and vacancies. In a downturn I would expect vacancies to increase. I ignored taxes.

These numbers were run as at end of April 2012.

One mortgage will come to the end of its natural life in mid 2013. At that time the sensitivity looks like this:

the Hong Kong investment properties will be cash flow positive if rents drop by up to 23%
the Hong Kong investment properties will be cash flow positive if interest rates increase from the current average of around 1% pa to around 4.3% pa

Of course the sensitivity to rising interest rates will decline by a small amount each month as more principle is paid off and cash flow sensitivity will take a jump each time a mortgage is fully paid off.

I have ignored the impact of rising interest rates on the mortgage on our home and the positive cash flow from the debt free properties outside Hong Kong.

Given the above analysis, other assets, cash on hand and the ability to cut household expenses if the need arises, I am no unduly worried about cash flow on the Hong Kong investment properties going forward.

Famous last words, I am sure.

Hong Kong to issue more iBonds

noreply@blogger.com (traineeinvestor) — Tue, 24 Apr 2012 02:05:00 +0000

While the Hong Kong government's plan to launch a second issue of iBonds in June is not exactly news, the upcoming issue has generated some recent debate in the media with views ranging from "it's the best free lunch on offer" to "they are a cynical political tool and a lousy investment".

While the iBonds are touted as bonds designed to protect investors from inflation, this is grossly misleading - they will do nothing of the sort. In the first place, there is no adjustment to the principal - you subscribe at face value and redeem at face value. Second, the coupon is linked to HK CPI - there is no premium over CPI to offer a "real" yield and, in fact, the yield is guaranteed to be less than CPI becuse (i) it is a trailing yield and (ii) bank charges on each coupon payment will have to be paid. Even this assumes that you believe that CPI is a realistic proxy for household inflation (not even close in my household). The floor of 1% is noted but I would be surprised if inflation dropped below 1%.

So why buy an investment that offers a guaranteed negative real return?

The investment rational is that I will be keeping a reasonable amount of money in the form of cash or near cash as I enter retirement (at least two year's worth of expenses). This asset allocation is all about reducing risk rather than maximising returns. While the returns on the iBonds are poor, they are better than anything else I can get in the short term debt or deposit market without taking on FX risk or material credit risk. This makes them more or less a no brainer.

Of course, like last time allocations are expected to be limited so it will be very much a case of taking what I can get (and, no, I wont pay a premium in the secondary market).

All this assumes that the terms of the new issue are the same as the first issue - which is yet to be announced.

Risks of not making early mortgage repayments

noreply@blogger.com (traineeinvestor) — Thu, 19 Apr 2012 01:08:00 +0000

In response to yesterday's post on when to make early mortgage repayments I received a comment pointing out the risks associated with carrying mortgages into retirement. The comment was quite on point in that stating that I was focused on the rewards and that carrying debt into retirement involved a greater degree of risk than not carrying debt. The same is true of debt at any time, but I will keep the discussion focused on the issues as they apply post retirement - that is when I no longer have employment related income to fall back on and have to meet the repayment obligations from my investments.

Interest rate risk

As is usual in Hong Kong, the interest rates on my mortgages are floating rates. All my mortgages are set at a margin over either one month or three month HIBOR. If HIBOR rises then the interest rates I pay on my mortgages also rises. If interest rates rise far enough and stay elevated for long enough, the investment properties will eventually end up with negative cash flow.

Rental income risk

The inward cash flow from the properties depends on three things: (i) the properties being occupied (ii) the amount of rent which each property earns and (iii) the tenants actually paying the rent. In adverse economic conditions the amount of rent each property can earn could decline and the vacancy factor could increase. This was certainly the experience in 2001-2003 when many landlords were forced to cut rents or accept lengthy vacancies.

Cash flow risk

The risk of a combination of rising interest rates, increased vacancies and lower rents pushing the properties into a negative cash flow situation is a very real risk. It's also worth remembering that if/when such circumstances occur, property prices will probably fall, so I have to assume that selling a property to alleviate the problem is likely to be a very unattractive option.

Inflation risk

Inflation has been higher than interest rates for several years now. As long as that situation is continues, keeping the mortgages on the properties actually reduces the risk of inflation adversely affecting my retirement plans.....right up to the point where higher inflation results in interest rates high enough to cause negative cash flow from the properties.

How big is the risk?

It has been some years since I last did a sensitivity analysis on the portfolio and I will do one at some stage before I retire. However, off the back of the envelope, I can say that the properties will still be cash flow positive:

if any one property is permanently vacant (or the two smallest ones); or
if vacancy rates remain the same as they have for the last few years but rents are cut by around 12%; or
if interest rates increase to a bit over 5%.

Of course, as explained above there is a possibility of all of these things happening at once which will result in negative cash flows much sooner.

It's also worth remembering that because the mortgages are P+I, the sensitivity to rising interest rates gets reduced each month, eventually being eliminated altogether once the last mortgage is fully paid off. One mortgage will be completely paid off in mid 2013 and the last one in 2029. The biggest mortgage is the one on our home and that will be paid of in 2020. As each mortgage is paid off the debt related risk declines.

I also intend to carry a meaningful amount of cash or near cash in retirement. If necessary, this can be used to either cover a negative cash flow or make some early repayments - the amounts involved are enough to be meaningful.

There is considerable room to cut our expenses if the need arises.

I could always get a job if the need arises (as could Mrs Traineeinvestor for that matter).

In short, while the risk is quite real, it is not one that I worry about too much. It is also one that will disappear over time.

Short term risk v long term risk

The alternative to carrying mortgage debt into retirement is to pay down the debt in lieu of making other investments and/or selling assets to reduce debt. While such actions would reduce the short term financial risks, over the medium to longer term the end result would be a smaller pool of assets and a retirement that is more vulnerable to adverse events (in particular inflation).

By not making earlier repayments, I am electing to increase the near term risks in order to reduce the longer term risks to the financial sustainability of my retirement. Given that it is easier to find well paying employment in my late forties and fifties than in my sixties or seventies, that is a trade off that I am more than willing to embrace.

I will do the sensitivity analysis but for now at least I am quite comfortable with my decision.

When to make early mortgage repayments

noreply@blogger.com (traineeinvestor) — Wed, 18 Apr 2012 02:32:00 +0000

All our Hong Kong properties are mortgaged and will remain so when I retire. Given current market conditions, it makes no sense whatsoever to make early repayments on any of the outstanding mortgages:

interest rates on the mortgages are currently averaging less than 1.0%
interest expenses are tax deductible
inflation is still above 4%
there is no shortage of good shares with yields well above 1.0%
the rental properties produce a positive cash flow after all expenses including the principal component of the mortgage payments
if I had to borrow today, I would probably end up paying 2.15-2.4%

There simply isn't a case for making voluntary repayments.

However, the interest rates are HIBOR based floating rates - they get reset either every month or every three months. If HIBOR rises then the interest rate I am paying on my mortgages will also rise. The question is, at what point should I start making additional repayments?

Without wishing to over analyse the situation, I would start making additional repayments if any of the following applied:

interest rates were higher than the rate of inflation
the investment properties were producing a negative cash flow
interest rates were higher than the yield on other available investments

In each case, it would also be necessary for me to believe that the situation would continue for some time and was not a short term issue.

It also helps that all of the mortgages are P+I - each month the balance gets a little smaller even without any additional payments and, as the balances get smaller, the impact of rising interest rates becomes less significant.

Fletcher Building purchased

noreply@blogger.com (traineeinvestor) — Tue, 17 Apr 2012 06:26:00 +0000

I have cleaned out most of the NZD/AUD which has been building up since my last purchase and invested it in shares of Fletcher Building (NZ: FBU). Fletcher Building has a degree of market dominance in New Zealand and substantive presence in Australia. The shares have recently been marked down on expectations that the company's profits will take a hit from a downturn in the Australian housing market and delays in the rebuilding of Christchurch.

The shares pay a dividend yield of about 4.5% (after netting out non-resident withholding tax) which is more than I am getting in the bank or can get on short term debt without taking undue credit risk.

I paid NZD6.27 per share.

Monthly Review - March 2012

noreply@blogger.com (traineeinvestor) — Sat, 31 Mar 2012 00:56:00 +0000

March saw the value of the portfolio decline, largely in line with the movements in equity markets and adverse exchange rate movements. Positive cash from on the properties (fully leased) only partly offset the losses elsewhere. Savings for the month were negative - and I cannot recall the last time that happened.

Here are the details:

1. my Hong Kong equity portfolio fell. I purchased shares in CKI Holding, BCIA, Tibet 5100, Cosco Pacific and CNOOC;

2. my AU/NZ equities were flat;

3.my ETFs fell in line with the local markets, with all being negative;

4. my commodities fell, led by silver;

5. all of my properties were occupied with all tenants paying on time. One property had a two week vacancy between tenancies and substantial costs were incurred in redecorating etc;

6. currency movements were negative, as the NZD and AUD fell against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month. I would like to add some more bonds to the portfolio but am finding direct purchases of bonds through the banks I have accounts with to be something of an exercise in frustration in Hong Kong;

8. I had no open derivative positions;

9. savings were negative due to a combination of low income (March is usually the lowest month of the year) and high expenses (paying for our annual holiday in April, the personal expenses for a recent business trip to London, my life insurance premium for the year being paid and the annual premium for the family's medical insurance - of these only the holiday costs had been substantially provided for through my accruals).

My cash position declined due to new investments. I currently hold 49.3 months of expenses in HKD cash or equivalents. This is more than enough - in fact it is too high given current inflation levels and the near zero nominal yields on bank deposits.

For the month, my net worth fell by 1.47%. The year to date increase is 13.95%. The year is off to a good start and I remain on track to retire at the end of 2012.

Tibet Water 5100 - partial sale

noreply@blogger.com (traineeinvestor) — Fri, 30 Mar 2012 02:41:00 +0000

This morning I sold the shares in Tibet Water 5100 (HK:1115) which I had purchased at HK$1.82 on Wednesday for HK$1.89/1.90. The profit was 3.2% (net of costs) for a two day holding period. I still hold the remaining shares purchased at higher prices.

As an aside, I attempted to pick up some shares in SHK (HK:16) at HK$92.00 this morning on expectation of a big drop following the arrest of the company's two co-chairmen (among others) in a corruption scandal. Unfortunately, the shares only got as low as HK$94.00 so I missed out.

Does Hong Kong really have a property bubble?

noreply@blogger.com (traineeinvestor) — Thu, 29 Mar 2012 10:21:00 +0000

There is no shortage of talk about Hong Kong's property bubble. In fact people have been calling the local property market a bubble for a few years now. Commentary usually proceeds on the basis that there is a bubble and then moves on to talk about the risks and implications (either with or without predictions on when the bubble will burst).

My non-expert attempt to satisfy myself that there is in fact a bubble is set out below. The conclusion I reached is that while Hong Kong real estate is expensive my many (but not all) measures, I was struggling to find evidence that there was in fact a bubble in the Hong Kong housing market.

Characteristics of a bubble

Looking at the definition of "bubble" it is fairly obvious that at least some of the key characteristics of a bubble are absent. In particular transaction volumes are subdued (and have been since the government's cooling measures) rather than "high". Also, while expensive (see below) prices have at least a reasonable connection with intrinsic values - with short term speculators (flippers/confirmors) being largely excluded from the market, most buyers are either end users or longer terms investors. That buyer profile is not consistent with the crowd of frothy speculators

It's also worth mentioning that the high levels of gearing commonly associated with real estate bubbles is notably absent. HKMA and bank imposed deposit requirements are high and many buyers are paying cash. Higher interest rates would be unlikely to result in a large number of distressed mortgagors.

Property price index

The leading index for the residential secondary market is the Centa-City Leading Index (CCL) published by Centadata which is available here. The chart below shows the CCL from 1994 through to 23 March, 2012.

It's worth noting that the CCL is based on actual sales prices in the secondary market. In other words it is a nominal index rather than a real (inflation adjusted index). Using Hong Kong CPI as a measure of inflation:

The CPI data is from Trading Economics which has some neat interactive features.

Very roughly, if the index was rebased to 1994 dollars, it would lower the 2012 value of the CCL by about 25.8% or from 99.17 to 78.83 and 1997's base CCL of 100 by 22.7% to 81.5%. In other words, from 1994 to 2102 in real terms the CCL rose from 63 to 99.17 (57.4%) in nominal terms and from 63 to 78.83 (25.1%) in inflation adjusted terms. Quite frankly, that's not much of a gain over a period of 18 years, especially when the expansion of Hong Kong's economy is taken into account. The compound annual increase in the value of the CCL (in either nominal or real terms) is small.

While it is just about always possible to quibble with the methodology used to construct an index, for present purposes, the only thing I will mention is that the CCL does not adjust for the size effect (the fact that larger properties typically sell for more per square foot than smaller ones). While I could not find any data tracking the average size of apartments in Hong Kong, anecdotally I understand that the average size has increased over time, although not by much. An adjustment to account for the size effect would reduce the rate of increase in the CCL.

Put differently, I would need to cherry pick the low point in the CCL in 2003 to show a reasonably high rate of annual increase in the CCL (and given that 2003 coincided with the end of the Asian Financial Crisis and SARS, it would indeed be an exercise in cherry picking the data).

Affordability

One way to measure whether real estate is expensive is affordability. Leaving aside reports like the one included in this article which are based on seriously flawed comparisons (at the very least there would need to be adjustments for differential tax rates and differential living costs - and in both respects Hong Kong does very well with most income earners paying no tax and not being burdened by the high cost of owning and running one or more private cars), it would appear that housing affordability today is much better than it was in 1997 (a combination of much lower interest rates and higher incomes) but worse than it was at the low point in 2003.

Given that (IMHO) high deposit requirements distort affordability comparisons even within Hong Kong, there isn't much point in debating the exact measures of affordability beyond the generalisations above. That said, it is not possible to claim that there is a bubble based on measures of affordability.

Other indicators

There is no denying that Hong Kong real estate is expensive in both absolute and relative terms. Hong Kong residential prices usually rank in the upper echelons of the global price bracket alongside cities like London and New York. Given Hong Kong's small size and status as a substantial financial centre, this is hardly surprising. Being expensive on a global comparative basis but no more so than several other cities does not a bubble make.

Yield is one yard stick used by investors to evaluate property as an investment. At the moment, gross yields on unfurnished mid-market units in good areas like Mid-Levels are in 3-5% range. Net yields are obviously lower and there is considerable variation between properties (as you would expect). Yields this low in an environment where inflation is 4.7%, bank deposit rates are negligible and mortgage rates are around 2.25% are both understandable and unexciting. In other words, it is possible to use at least some gearing and be cash flow positive on an investment property.

Conclusions

After going through the exercise, I failed to find anything that justified characterising Hong Kong's property market as a 'bubble' - none of the usual features of a bubble are present.

That said, real estate here is expensive (especially in the luxury sector) and I don't see enough value in the local market to justify adding to the portfolio. Given the political climate and the government stance on the property market as well as macro factors it is easy to see prices falling to some extent - how much is anybody's guess (and plenty of people are guessing). Given that affordability remains high and interest rates very low, it's also not beyond the realms of possibility that prices could go higher as well. Quite frankly, I have no idea.

Implications

As far as the implications of this exercise for my own investments are concerned, there aren't any. We will continue to hold our properties, collect the rent and reluctantly make the mortgage payments. We are unlikely to buy again at these levels - the value just isn't there. If prices drop far enough, we'd consider buying again. (And it goes without saying that just because prices drop by a meaningful amount in the future, that does not in any way validate claims that we have a bubble today.)

CNOOC purchased

noreply@blogger.com (traineeinvestor) — Thu, 29 Mar 2012 05:35:00 +0000

In spite of it already being my largest holding, the combination of solid results and a falling share price prompted me to add a few more shares in CNOOC (HK:883) to the portfolio. Given the size of my position in this company, I will probably look to sell a few shares into the next rally.

I paid an average of HK$15.95 for the additional shares.