Traineeinvestor's diary - HK and Far East Focus

[Traineeinvestor]

One of problems with those sorts of comparisons is that they do not break the population down into the segments that buy private sector property and the segments that do not. Taking Hong Kong as an example, more than half the housing stock in HK is either paid for or very very heavily subsidised by the tax payer (including NT village housing). Although I keep coming across different data points, probably a slightly higher proportion of the population lives in the subsidised housing - mostly the lower earning members of the population. However the affordability comparisons compare private sector housing costs with the average (usually mean) incomes for the whole population which is grossly misleading in its own right and even more so when one considers that the proportion of people in subsidised housing varies hugely from country to country (with Hong Kong being one of the highest among the free market economies).

 

There are of course other issues with these comparisons as well (e.g. tax rates, income allocation to transport and medical costs etc).

[Traineeinvestor]

Given the slow down in the PRC property market, the forthcoming HK/Shanghai stock exchange linkage and the growing commentary on cheapness of the PRC equity markets on both an absolute and a comparative basis, I have added units in the CSOP A50 ETF (HK: 2822) to the portfolio on friday paying HK$9.43 per unit.

 

FWIW, Peter Churchouse's latest Hard Assets Investor has recently recommended both 2822 and it's H share equivalent 2822.

 

I also have to give some further consideration to switching out of the iShares A50 ETF (HK:2823). In addition to being synthetic, 2823 has a total expense ratio of 1.39% whereas 2822's expense ratio is lower at 1.15%. I originally purchased 2823 because (at the time) 2822 was far less liquid - something that is no longer an issue.

[drbubb]

"switching out of the iShares A50 ETF (HK:2823)... whereas 2822's expense ratio is lower at 1.15%."

 

That seems to be a sound idea

[Traineeinvestor]

HK property market continues to strengthen.

From the SCMP: http://www.scmp.com/property/hong-kong-china/article/1582048/strong-sales-new-flats-point-hong-kong-property-market

In addition to continued strong demand from both end users and investors, the interesting things was that, once again, there was no mention of PRC investors suggesting that almost all of the demand was from local investors.

[drbubb]

My partner wanted to visit Tin Shui Wai (spelling?) today.

Someone hold told her "that's the place to buy" - so we went

 

Prices are up almost 8% in the last month.

From about $3.05 to $3.33 Million for a 2BR flat in the last month.

We don't like to "chase" market, so that rise put us off.

 

It is certainly tough now to find a decent flat anywhere in HK under HK$5 million.
I think the next sector to push higher, might be the $5mn-$8mn flats

[Traineeinvestor]

Another high for HK property with smaller flats doing best: http://www.scmp.com/property/hong-kong-china/article/1585833/hong-kong-property-rent-prices-hit-record-july

And predictions that the increases in price will continue:

The developer of the estate where we live has decided to sell all its remaining carpark spaces to owners in batches with a balloting systems. With the last two private transactions at HK$3.3 million and only one currently being offered at $4.5 it will be interesting to see what the asking prices will be.

[drbubb]

Hmmm.

The levels are getting close to my Sell Target (on my flat)

 

I wonder if I have will the courage to pull the trigger, and endure the hassle, and stress

[Traineeinvestor]

The problem with selling one's home is that one still has to live somewhere and being out of the market carries the risk of being "priced out" over the longer term (as many people who sold out a few years ago because the "experts" said it was going to get a lot cheaper are now finding out).

 

While I can and have sold investment properties, it is unlikely that I would ever exit the market completely - owning our home is in someways a hedge against future increases in the cost of housing.

[drbubb]

Agreed.

However, I have bought a property in the Philippines, and may live there one day.

As it happens, it will not be completed for three years.

 

(My partner also owns a small flat in HK. We will probably not live there,

but it provides some sort of hedge against further price rises.)

 

With all this, I have to factor in three years of Renting, into my sales decision.

And 12 months from now, it will be two years of Renting

[Traineeinvestor]

Not surprised at all to see you have thought through all the issues.

 

This piece on Bloomberg about how much money all the doomsayers have cost investors who follwoed their advice caught my attention: http://www.bloomberg.com/news/2014-09-08/you-missed-1-trillion-return-agreeing-with-fed-naysayers.html Not mentioned, but anyone who went heavily short instead of just sitting on the sidelines would have been as screwed as the American taxpayer.

 

I'd post it on the other place but would expect nothing but the usual rambling cut and paste about how the economy would have collapsed but for QE and ZIRP (which is as utterly meaningless as saying that the weather would be cooler tomorrow if the sun didn't rise).

[drbubb]

Bloomberg is announcing Victory for the Fed (and Bernacke) while they still can (I suppose)

 

If you agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis,

you missed $1 trillion of investment returns from buying and holding U.S. Treasuries.

 

I am happy that I have strayed from the short side, about two years ago.

But now am wondering if it is time to start "flirting" again (?)

 

RE: Property.

I have a plan. But there are bound to be surprises along the way.

 

I'm going to post something on AX about SHKP now focusing on small flats.

That will (eventually) be bad news for the owners of small flats.

In the next drop, when they remove the extra stamp taxes, the Big Flats may bounce back faster

[Traineeinvestor]

Certainly - markets change and it is hard to imagine getting much (if any) real return out of US treasuries at this stage of the cycle. My HK$0.02 worth is that you have to go either a long way out along the yield curve or sacrifice a lot of quality to get an acceptable real return on bonds. As a matter of disclosure, I have held this view for a while and been proved wrong (mitigated by investing in equities which have done well).

 

Agree on the small flats - people are buying them to get a foothold on the property ladder but sooner or later the desire to trade up will meet with the tighter supply of larger units to give larger flats the edge - maybe - larger flats are still quite a premium on a psf basis.

[drbubb]

Certainly - markets change and it is hard to imagine getting much (if any) real return out of US treasuries at this stage of the cycle. My HK$0.02 worth is that you have to go either a long way out along the yield curve or sacrifice a lot of quality to get an acceptable real return on bonds. As a matter of disclosure, I have held this view for a while and been proved wrong (mitigated by investing in equities which have done well).

 

Agree on the small flats - people are buying them to get a foothold on the property ladder but sooner or later the desire to trade up will meet with the tighter supply of larger units to give larger flats the edge - maybe - larger flats are still quite a premium on a psf basis.

 

Hmm.

"larger flats are still quite a premium on a psf basis"

Is that still true?

On the New properties, I have visited, 2BR and 3BR flats seem to be offered at maybe a 10% discount

to the smaller flats. And they may be a better buy for Own-use if the size is needed

 

(I have posted on AX, and on the HK Property thread here):

 

SHKP Properties wants to switch to Small Flats

One of the Big two HK Property developers has applied for permission to switch their approvals from large family flats and house to small flats, like 350sf, costing $4 - 6 million.

This is what the market wants to buy now. And if they get all the approvals sought, they will build much smaller flats, but maybe 4-5 times as many.

The Impact on the future market is something to ponder, if you are thinking of buying a flat.

[Traineeinvestor]

This is clearly bearish for gold: http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=252969&sn=Detail

 

It also serves as a useful reminder that for many potential investors in gold, local concerns are vastly more significant than global geo-political issues.

[Traineeinvestor]

Chinese Gold and Silver Exchange Society becomes the first non-PRC operator given permission to set up a gold and silver storage facility in China: http://www.bloomberg.com/news/2014-09-15/hong-kong-gold-bourse-approved-to-build-vault-in-china.html

 

Not so much significant as an indicator of how the centre of the global precious metals business is shifting.

[Traineeinvestor]

Some observations on the impact of the Shanghai Excchange on the demand for physical gold:

 

http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=253679&sn=Detail

 

One of the comments included this statement:

 

 

The fair and transparent price discovery of Gold, hopefully to become reality on the Shanghai Gold Exchange, will most likely show a trend toward higher prices in the East than on the Comex due to outright physical demand

 

I seriously disagree with this. China has made consistent and succesful efforts to keep the prices of the commodities which it imports at the lower than free market levels (iron ore, coal among others). Gold and silver will be no exception - as long as China is in accumulation mode they will do everything they can to keep the price down.

[Traineeinvestor]

Added a few more units in the CSOP A Share ETF (HK:2822) to the portfolio this morning. I paid HK$9.55 per unit.

[drbubb]

The way that Silver prices have fallen while SGE Silver Inventories has been squeezed down in notable.

 

But with them down over 90%, it is clear that dynamic MUST end soon

[Traineeinvestor]

We bought a carpark in our building. In terms of price/yield it is not a good investment but (i) the developer is selling all the remaining carparks not previously sold and secondary sales are few and far between and (ii) there is a shortage of carpaks in this development and (iii) the sale price was about a 10% discount to the most recent sales in the secondary market earlier this year. We have no plans to buy a car (at least, I don't - Mrs Traineeinvestor may have other ideas) so I will be renting it out once the sale completes in December.

 

Separately, five news items grabbed my attention this week. None of them is exactly new, but they make a very solid case for monetary liquidity and low interest rates to be with us for a long time with consequent implications for asset prices:

 

1. China continues to move towards free convertibility of the RMB - a lot more money and people will have the freedom to escape from the PRC

2. Japan wants its pension funds to diversify away from bonds - a lot of money could flow to equity markets

3. Japan added another round of stimulus - more money being pumped into the system

4. The EU is talking about bond purchases (aka QE) - if they actually do it on the scale of the US or Japan or China that is a lot of extra money being pumped into the markets

5. China injected more cash into its banking system - more evidence that China's financial system has a low list of suffering a liquidity crisis

 

Okay, so maybe I am looking for confirmation of existing beliefs but it I'm finding it a lot easier to justify holding real estate and equities than cash in the bank at the moment.

 

And the bear market in gold/silver remains a piece of data that is very hard to reconcile with the continuing deluge of money being unleashed on the markets.

[drbubb]

There's good flexibility in that investment, since you can rent it, or use it.

And I think the extra taxes are less of a factor.

 

My own partner (Mz.Bubb?) bought a small flat two years ago, and is sitting on a prospective 20% gain.

We are now considering the notion of retirement to Thailand (perhaps). So I can imagine a scenario where

one of both of us would sell our HK flats.

 

The GAIN alone on her flat, would allow us to fund about 80% of a larger new flat in Chiang Mai :

 

xx

 

Prospective yields are perhaps 7-8% or higher.

 

If I sell my own newer and larger flat, the gain alone would finance something newer and larger.

 

It is an attractive option that we will seriously consider in the months to come.

And you can follow some of the research here:

http://www.greenenergyinvestors.com/index.php?showtopic=19583

 

BTW, there's also been a happy surprise in the Philippines, where Ayala has bought out the

eyesore building next to our property investment there, and this should help the valuation:

 

 

My bull idea on Silver has been ill-timed. Thank goodness, it was only thru options, so carried

limited risk.

 

I do think pressures are building to delink the HK dollar from the USD, and with the dollar so

strong, I bought yesterday a nice chuck of PH Pesos that I will need for my property investment there.

[Traineeinvestor]

The RMB 20,000 daily limit for HK residents will be abolished on Monday (17/11/2014) as part of the HK/Shanghai stock connection. The interesting issue from my perspective is not so much whether the RMB will gain as a result but whether the resulting sales of HKD will either put pressure on the HKD:USD peg and/or result in upward pressure on HKD interest rates? If enough people believe that the RMB is a one way bet (it is not) and higher interest rates can be obtained on RMB deposits than HKD (they can), the only question is how much money will flow from HKD to RMB? I have no idea (and doubt if anyone can do more than guess) but it will be interesting to watch.

 

In the bigger picture, this is just another step on the way to the RMB being a fully convertable currency.

[drbubb]

It will be interesting to watch.

 

They could not allow Two-market trading in stocks without this

[Traineeinvestor]

Agree - it was necessary (and would have happened at some point anyway).

 

Where to find a bargain on HK property: http://www.bloomberg.com/news/2014-11-11/-haunted-apartments-go-for-cheap-in-hong-kong.html

[drbubb]

". The sales value of the unit in the luxury J Residence would decline from HK$9 million to HK$6 million if it were sold immediately, the person said."

 

I heard about that.

I think that's too much ($6mn), since that Flat has a very unhappy legacy, that people will never forget.

I heard people on nearby floors were moving out. It's tough for the landlords

[Traineeinvestor]

A couple of updates (end of semester assignments have been keeping me busy).

 

I purchased a carpark in the development where we live. Most were owned by the developer who decided to sell them off at prices that were either a bit above or a bit below the last deals done in the secondary market (depending on which carpark you look at). Even at the very high rentals being struck (one was at $8,300 per month) the yields are fairly anaemic but the supply is fixed and the demand is very high. I rented mine at a lower rent but for a longer fixed term contract. As a comparison, carparks in Leighton Hill in Happy Valley now sell for $4 million

 

I've been adding shares in New Zealand Refining to the portfolio. The company has just about finished a major capital investment that will significantly reduce refining costs. Add in the lower oil price and the lower NZD and I think the company is significantly undervalued. First parcel was purchased at NZD1.85 and the second today at NZD2.22. It's possible that I might have been influenced by the great performance of my investment in Caltex (ASX: CTX) over the last few years.

 

On HK interest rates - so far there has been no sign that the HK-Shanghai connect + unlimited RMB conversion has had any impact on local interest rates. Still paying less than 1% on all but one of my mortgages.