Hong Kong Real Estate: Consider Selling If Profit = 100% or More

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

September 2004 

Based on published data and media reports, the Hong Kong real estate market in particular the residential market has entered into a sort of tug of war phase, with prices going up for some sectors and properties, while a few have even seen a bit of downward adjustments. Industry people and professionals also hold different views with some expecting prices to continue upwards, while others forecasting prices to be more or less flat in the near future. Overall, the residential market has picked up around 40% since last year from the trough, though the distribution is not even, and certain luxury residential properties have reportedly seen price appreciation of around100%.

Your humble author has several friends and clients who had shrewdly invested in properties last year during the trough and thus are now faced with the dilemma of whether to continue holding or to sell cashing in. This relates not only to market dynamics but also one’s investment parameters / preferences including such items as return expectation and risk tolerance. What suits investor A may not suit investor B. Nonetheless, given all things being equal, perhaps investors who have already made great gains (such as 100% profit or more within a year) may contemplate selling, if not in whole at least in part. Here is the rationale:

a)      Not easy to make or to have 100% profit or more within 1 year = even if one has access to many global investment opportunities, and even the well-known investment gurus do not make 100% return or more year after year. This is NOT saying that we expect prices to go down yet for those who have already made such tremendous gains, and in particular if the portfolio is highly leveraged, it seems sensible to consider selling portions if not all of the portfolio.

b)      It takes twice as much resources to produce (induce) the 2^nd 100% profit as it has done for the 1^st 100% = let’s say a residential unit has already doubled from an original price of HK$10M to HK$20M, and for this unit to double a 2^nd time from HK$20M to HK$40M, the resources required would be HK$20M (HK$40M-20M) versus the 1^st round of HK$10M (HK$20M-10M). In short, one needs to double the effort to achieve the same result.

c)      Risks are higher = assume a property will eventually quadruple in prices from HK$10M to HK$40M and all things being equal, the risks involved with the first HK$10M gain (from HK$10M to 20M) are generally lower than that related to the last HK$10M gain (from HK$30M to 40M). This is to say from a ‘return to risk’ ratio perspective, the last HK$10M brings the least attractive ratio.

d)      Real estate transactions take time = while stocks can be traded instantly as market news arise, real estate transactions are seldom as instant, and the lag may be in terms of months or weeks, or at the very least days. This is also why most real estate sellers apparently seem to lag behind the market (especially when it is going down), and in turn this implies vendors need to have sufficient guts to ask for a lower than generally expected price in order to sell quickly in a down market = yet not everyone can do that observably.

In summary, investors who had already made great gains may consider selling portions of their real estate portfolios, in particular those portions with lack luster / below market rental yields, after careful deliberation with related / their investment counsels.

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