Another metric for housing value in HK

There is a fixation on the location of property in Hong Kong. However, I think the focus should be on travel time because basically it is the opportunity cost of time that is paramount. Reduction in travel time should mean an increase in leisure time.

Time = distance / speed.

Even though the distance may be greater, as long as the speed is faster, there is no change in time. Faster speed may be attributed to less traffic congestion, less traffic lights, less stops along a train line, etc. Due to the efficient public transport/general transport infrastructure in Hong Kong, speed is generally faster than in other countries.

A value metric for property based on travel time is proposed.

Price (purchase price or rent) is usually a function of convenience and also property size. One factor when determining convenience is the travel time to reach to Central, which is where most office jobs are located.

Raw distances
19.9kms - Seasons Monarch -> Prince's Building

3.9kms - Park Avenue -> Prince's Building

1km - Valiant Park -> Prince's Building

Via MTR from Seasons Monarch
Kam Sheung Rd MTR -> East TST MTR -> TST MTR -> Central MTR
27 minutes + 4 minutes (walking time) = 31 minutes
$4.9 + $15.9 = $20.80 fare

Door to door is 45 minutes
leave Seasons Monarch at 8:45am, arrive in office at 9:30am.

Kam Sheung Rd MTR -> Nam Cheong MTR -> Hong Kong MTR -> Central MTR
15 minutes + 12 minutes (3 minutes walking time at Nam Cheong and 9 minutes from Hong Kong MTR to Central MTR) = 27 minutes


Via Bus from Seasons Monarch
Tai Lam Bus Interchange -> ICC at Kowloon MTR via KMB bus no. 968, 969, 969P
20 minutes

Tai Lam Bus Interchange -> Central via KMB bus no. 968, 969, 969P
40 minutes


Via MTR from Park Avenue
Olympic MTR -> Hong Kong MTR -> Central MTR
7 minutes + 8 minutes (walking time from Hong Kong MTR to Central MTR) = 15 minutes


Seasons Monarch
$7,753,340 - Purchase Price/Cost Base on 13 October 2009
2,837 square feet. 1,322 square feet internal (usable). 46.59% efficiency. Excluding roof, driveway & backyard.

$2,732.94 price per square foot
$2,732.94 X 32 minutes = $87,453.96 to Central

$5,864.85 price per internal square foot
$5,864.85 X 32 minutes = $187,675.20 to Central

Park Avenue
$8,000,000 - Purchase Price on 27 May 2008. 8.8% compound annual growth rate.
$4,343,000 - Purchase Price on 1 March 2001
982 square feet. 743 square feet internal (usable). 75.66% efficiency.

$8,146.64 price per square foot
$8,146.64 X 15 minutes = $122,199.6 to Central

$10,767.16 price per internal square foot
$10,767.16 X 15 minutes = $161,507.4 to Central

Considering time to travel to Central with the price per square foot, Seasons Monarch is 28.4% cheaper than Park Avenue.

Considering time to travel to Central with the price per internal square foot, Park Avenue is 13.9% cheaper than Seasons Monarch.

Note 1: We are not including the benefit of a driveway at Seasons Monarch. A car park at Park Avenue is about $2,000 - $3,000 per month. To buy a car park is approximately $320,000. To make a fair comparison, then the $320,000 should be added to $8,000,000. The price per square foot for Park Avenue becomes $8,472.51. Therefore considering time to travel to Central with the price per square foot, Seasons Monarch is 31.2% cheaper than Park Avenue.

Note 2: We are not including the travel time door to door. It takes 5 minutes using the shuttle bus from Seasons Monarch to reach Kam Sheung Rd MTR station and 10 minutes to reach the Tai Lam Bus Interchange. However, it also takes 5 minutes walking time from Park Avenue to Olympic MTR station.

Owning in Seasons Monarch versus Renting in Park Avenue
$9,886.53 - monthly cash expense at Seasons Monarch (interest, management fee, rates, insurance) for 2,837 square feet
versus
$25,000 - monthly rent at Park Avenue for 982 square feet, in Tower 9, upper floor.

Assumptions:
If you live in the same location, but pay lower cost, then this is better.
If you live further away and pay a higher cost, then this is worse.
If you live closer and pay a higher cost or live further away and pay a lower cost, then we need to calculate whether it is better value or not.

Seasons Monarch - 32 minutes X $9,886.53 = 316,368.96
Park Avenue - 15 minutes X $25,000 = 375,000
Sorrento - 13 minutes X $26,000 = 338,000
Mei Foo Sun Chuen - 21 minutes X $16,000 = 336,000

The lowest value above indicates best value for money in terms of travel time to Central.

What HK property boils down to

If you want larger living space, and have a limited budget, your two choices in Hong Kong are:
1) Live in an old, run down place
2) Move further away from Central

We chose option 2).

Monthly housing expenses
$7,554.70 - Interest (average over 48 months)
$2,078 - Management Fee
$675 - Government Rates
$405 - Government Rent
$598 - Home Insurance
-$1,424.17 - Home Loan Interest Tax Rebate capped at $100K
$9,886.53 - TOTAL

on a per square foot basis, this is $9,886.53 ÷ 2,837 square feet = $3.48 per square foot.
which can be used to compare against the rent price per square foot of other properties.

Monthly housing cashflow
$16,442 - Mortgage repayment instead of just interest
everything else the same
$18,773.83 - TOTAL


Owning versus Renting
The HK government believes the rateable value is $13,500 per month. They are not far off in their calculation compared to $11,519.33. Landlords in Seasons Monarch are asking $25,000 per month in rent. Therefore your monthly saving by owning rather than renting in Seasons Monarch is $25,000 - $9,886.53 = $15,113.47.

In 4 years time when you want to sell your house, the savings accrued will be $15,113.47 X 48 months = $725,446.36.


Profit Potential of Owning
Non-capital expenses when purchasing the property were:
$281,250 - stamp duty
$2,500 - solicitor's disbursements
-$42,000 - HSBC cash rebate
$241,750 - TOTAL

Total cash used in 4 years:
$2,250,000 - deposit
$253,340 - renovation cost
$241,750 - non-capital expenses when purchasing the property
$18,773.83 X 48 - monthly housing cashflow
$3,646,233.84 - TOTAL

Assuming the renovation cost is added to the cost base of the property, then the property after renovation should be worth $7,753,340.

Loan principal outstanding after 4 years is $4,887,374.20 maximum.

A conservative estimate on the capital appreciation of your house would be that it is in line with inflation in Hong Kong. The inflation rate in Hong Kong is 2.8% at February 2010. Of course if the property appreciates faster than the inflation rate, the cash-on-cash return would increase. e.g. for a moderate annual growth rate of 5% or bullish rate of 10%.

Annual Growth Rate - Cash after repaying mortgage - Net Cash Return - Cash-on-Cash Return
2.8% - $3,771,497.16 - $125,263,32 - 3.44%
5% - $4,536,859.03 - $890,625.19 - 24.43%
10% - $6,464,290.89 - $2,818,057.05 - 77.29%

If you did not own you would not enjoy any capital gain on the property you are renting. However, with the opportunity cost of not buying a property with your cash, you could leverage and make money from another investment, i.e. share investing.

Net Profit at the end of 4 years, total capital gain % at the fourth year
Capital Gain % - Profit/Loss
Nil - -$716,303.63 loss
11.68% - $189,286.47 (2.8% p.a.)
21.55% - $954,541.13 (5% p.a.)
46.41% - $2,882,021.45 (10% p.a.)


Net Savings at the end of 4 years, total capital gain % at the fourth year
Capital Gain % - Profit/Loss instead of renting (saving of $725,446.36)
Nil - $9,142.72
11.68% - $914,732.83 (2.8% p.a.)
21.55% - $1,679,987.49 (5% p.a.)
46.41% - $3,607,467.81 (10% p.a.)

Basically, the property could be sold for 0.12% less than the cost base of the property, and you would still be the same as if you had rented. This is the only fair comparison that should be made. Therefore there is plenty of upside potential and minimal downside risk.

Buying Australian investment property without using new cash

Aeon bank in Hong Kong will lend 7 times salary at 0.19% monthly interest rate (i.e. 4.21% APR), unsecured. This is equivalent to A$112K

Australian banks will lend maximum 70% on an apartment in a high density block (> 30 apartments in the block). Therefore, you will require 34.5% of the purchase price as cash to cover the 30% deposit plus the stamp duty and other purchasing costs.

The 34.5% of the purchase price needs to come from the unsecured loan from Aeon bank.

To have a neutral gearing (expenses = income):

If the interest rate on the loan is 5.59%, then the net rental yield needs to be 3.91%.

If the interest rate on the loan is 6.59%, then the net rental yield needs to be 4.61%.

interest rate ÷ net rental yield = 1.429 (ratio)

To quickly determine if a property is a worthwhile investment, calculate the net rental yield (gross income - strata - council - water - managing agent's commission) and compare to see whether it is the same or greater than: (interest rate ÷ 1.429)

When the honeymoon on the loan expires in 1 year, increase the rent proportionally to cover the increase in the interest rate.

Use any positive gearing from the property to repay the Aeon bank loan together with any surplus cash from salary income.

Inflation

There is an assumption that property prices should rise at least in line with inflation. Inflation should translate into asset price inflation.

Inflation rate in HK: 1.3% (source: Census & Statistics Department of Hong Kong)

Inflation rate in Australia: 2.1% (source: Reserve Bank of Australia)

A home in Hong Kong

Following my own advice set out in the post Take advantage of Hong Kong, I purchased a semi-detached dwelling in Yuen Long, New Territories on 1 September 2009. The townhouse was completed in July 2009 but I am a second hand buyer (so unfortunately I must stamp duty whereas the first owner did not). I paid 0.99% higher than the first owner. It is a gated community and provides excellent security and new facilities like gym, gardens/parks, clubhouse and pool. The townhouse has a GFA > 2800 sqf. We elected 60 days for completion.

Transport Options

The MTR station is 1 km from the estate. There is a free private shuttle bus that runs to the MTR station and Tai Lam Tunnel bus intercharge from the estate every 30 minutes.

Alternatively can also catch two public buses, the KMB 54 and KMB 77K which stop in front of the estate on Kam Tin Road, which come every 5 - 10 minutes.

You can catch or you can drive to the MTR station (Park N Ride at the MTR station for HK$20 all day) or catch a taxi to the MTR station. It takes approximately 27 to 35 minutes by MTR to get to Central.

If you drive all the way, it will take 30 minutes to get to Central by taking the Route 3 highway. The two tolls add up to $75 one way.

Financials

Now the numbers ...

Purchase price: $7.5m

Stamp duty: $281,250

Agent's Commision: Nil

Solicitor's Fees: Nil

70% loan from bank: $5.25m

Interest rate: 2.1% for deposit-linked mortgage

Loan term: 40 years

Cash Rebate from Bank 1%: $52,500

Monthly repayment: $16,176 (interest component is $9,187.50)

Monthly management fee: $2,078

Fire insurance: Nil (estate has master policy)

Government rate: $534 (3% of rateable value)

Monthly expenses (not cashflow): Interest + Monthly management fee + Government rate

= $10,375.33 and dropping as interest component slowly reduces

In comparison, my current rent is $27,000 for GFA of only 982 sqf.

The property needs to appreciate by at least 2.36% per year over the next 4 years for me to live for free (i.e. cover the capital costs such as stamp duty, and ongoing costs such as interest and monthly management fees).

If the property appreciates by 17% in the next 4 years as expected by many analysts for the HK property market in general, then this equates to a 4% compound annual growth rate. The total cash used was $1,812,671.72 in the 4 years and the gross capital gain is $1,275,000. The compound annual growth rate of cash that has been used is 14.24% which is just a bit less than Warren Buffet's target of 15%.

As an expat, why buy in property Hong Kong?

The apartment I live in was bought by my landlord for $8m in June 2008. It was $8,146 per square foot.

HSBC valued the property at various times as:

10 February 2009 - $6.24m (-22%)

15 April 2009 - $6.55m

18 May 2009 - $6.86m

11 August 2009 - $7.56m

The landlord's purchasing cost is:

$300K - stamp duty

$80K - agent's commission

$8K - lawyer's cost

Grand Total - $388K

Assume our landlord has a 70% home loan to avoid mortgage insurance and has a 2.1% interest rate over 30 years. Her monthly repayments are $20,980 and the interest component is $9,988. Each month, the landlord's operational expenses are:

$9,988 - interest

$1,571.20 - management fee

$890 - government rate

$175 - fire insurance

Sub-Total is: $12,624.2

Amortise the purchasing cost above into 24 months, and then

Grand Total is: $28,790 per month

Our cost to rent is $25K X 24 months = $600K + agent's commission ($14,312.50) + stamp duty on tenancy ($812.50) + removalist cost ($2,980).

Amortise the agent's commission and removalist cost into 24 months, and then

Grand Total is: $25,754.38 per month.

Therefore it is cheaper to rent than buy in the example above.

Furthermore, as an expat, why bother contributing to the HK economy by purchasing. You are paying the agent, the lawyer and the government a total of $388K. If your rent was $25,754.38, this would cover 15 months of renting.

If the current price of an apartment is selling for above the long term average price, then your financial risk is:

1. The price of the apartment must rise by $388K + $1% of selling price (to your agent) at the time you sell it.
2. You cannot lose your job or sell quicklyto avoid the negative effects of bad timing.
3. If you intend to return home to your country, you are exposed to currency exchange risk because you the exchange rate may be bad when you sell your apartment.

Paying the rent subsidises (or in theory completely cover) the landlord's cost. But the landlord bears the risk of the asset devaluing (up to 22% devaluation as seen above). To be a profitable investment, the landlord should generate 10% on the cash input ($2.4m - 30% deposit and $388K), which is 10% X $2,788,000 = $278,800 per year is what the property needs to appreciate by which is 3.485% of the purchase price.

Peter Spann Strategy for property investing

This is Peter Spanns '7 years to retirement' stratergie in a nutshell.

1/ Buy IP with basic renotation potential.
2/ Renovate property
3/ Draw down 'new instant equity'
4/ use as deposit on next IP
5/ Do it all again

6/ At some point, wait a year, draw down new equity and invest into '7 power performing selection critera shares' or now he pushes quality managed funds or write covered calls
7/ use income from these shares/covered calls to offset interest only loans on IP's
8/ increase rent
9/ once servicability allows, and equity is avaliable purchase another IP
10/ keep doing this till you develop enough income to replace your '9-5' job income or more.

On the surface this stratergie looks good, but in practice I can see flaws in it. Firstly the ability to pay the interest, your constantly re-drawing equity, increasing your debt. Sure you increase rents, but these increases never seem to be enough to cover these extra borrowings unless you wait years for the rents to catch up.

Peter Spann's user ID:

http://www.somersoft.com/forums/member.php?u=3097