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Hong Kong Residential Real Estate from 1994 to 2006: the Best Investment Period is Post-1997

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

June 2007

This might have come as a surprise to some, considering that many real estate investors and homeowners appear to long for the real estate heydays in 1997 and prior. However, a simple examination of data and indexes from www.centanet.com suggests otherwise, and here are some of the observations

A)    Returns % [based on the CCI indexes in the said website]

 

1)     From 1997 to 2006 = if one invested in Hong Kong residential real estate in 1997 and pulled out only in 2006, one would have incurred a loss averaging 44% before expenses etc.

 

2)     From 1994 to 2006 = if one had invested not right at the peak year of 1997 but earlier in 1994 and sold in 2006, one would still have incurred a loss though lower at 18%. 

And here are the interesting portions

3)     From 1994 to 1997 = if one had invested in 1994 and sold at the peak year of 1997, one would make a gain averaging some 47%.

 

4)     From 2003 to 2006 = if one had invested in 2003 and disposed of the properties in 2006, one would have made an even higher gain of 70%. Note this involves the same timeframe of 4 years.

 

B)    Risks (Volatilities)

 

1)       From 1997 to 2006 = the volatility of 0.35 is highest among the different periods listed herein. Volatility is obtained by dividing the standard deviation for the period by the average for the period.

 

2)       From 1994 to 2006 = the volatility of 0.30 is still high yet is slightly lower than the period above. 

3)       From 1994 to 1997 = the volatility is lower at 0.26.

 

4)       From 2003 to 2006 = the volatility is even lower at around 0.22 despite it is part of a decade (1997 to 2006) in which the overall real estate price volatility is highest [see B1 above].  

Hence, combining the return and risk attributes for each of the four time periods above, we would have the following chart: 

 

Practically from an investment viewpoint, and with the benefit of hindsight, residential real estate investments in both periods from 1994 to 1997 and from 2003 to 2006 make good sense, with the latter period being the better one.  

Interesting to note that bad news and tough challenges in and prior to 1994 appear smaller and fewer than what were experienced, such as the high tech stock bust and SARS, in and prior to 2003. Not only does this provide in part the reason for the latter period to offer higher return prospects (due to more depressed prices), this also gives strength to the notion that the worse the news and market conditions are, the better the chance for making great gains is. Investors should appreciate and say Make My Day to bad news and market sentiment.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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