Hong Kong Real Estate: Long Term Does Not Always Pay

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2011

People generally seem to think it is virtuous to invest for the long term and some people think short term speculation is a vice.

Your humble author begs to differ because we might have read too much into the relationship between virtue and investment timeframe i.e. is it certain that long term investors are better and more decent human beings? And for that matter, are all short term speculators crooks? It would certainly be an interesting research endeavor combining finance, behavioral science, and philosophy.

Newspapers these days carry daily real estate news and transactions with indication of how much return the sellers have made and how long such sellers have held the properties.

As such, and based on the online version of Apple Daily, one of the more popular dailies in town, we have plotted the 82 secondary residential real estate transactions reported in the first 6 days of July 2011. Here are some interesting observations plus a couple of technical explanations:

a) The (horizontal) X axis is how much return, in percentages, has been made = so the further to the right the dot is, the higher (better) the return will be.

b) The (vertical) Y axis is for how long, in number of years, the seller has held the property prior to sale = so the further up the dot is, the longer (thus probably worse off) the investment period (and the investor) would be.

c) Long term investment in Hong Kong residential real estate appears to make sense ONLY if the investments were made more than 20 years ago = evidenced by the 2 transactions which brought in the highest 2 returns of 1450% (held for 27 years) and 790% (held for 24 years) respectively. That would also mean 1987 or earlier.

d) Long term investment of less than 20 years do not appear to have fare too well compared to investments made 10 or less years ago = evidenced by the cluster of (80 remaining) dots leaning toward the left edge of the chart. Of these 80 dots, for instance, a 19-year investment brought in only an 86% total return (throughout the whole period, that is) while an 8-year one brought in 260%. Likewise, many investments held for 10, 15, 16 years or so were either matched or outdone by investments made in the last 1, 2, 3, 5, 7 years or so. So much for long term investing in 1992 or thereafter.

Now, let’s get rid of the two 20-year-plus transactions which skew the whole chart and focus on the 80 transactions which sellers had not held the properties for more than 20 years:

1) Note it is essentially the same chart as above but without the two longest term investments = that is the chart below details the 80 dots which cluster toward the left in the chart above.

2) Now, you can pick any return % and see how the transactions were spread in terms of investment years = for example, along the 100% return line, the best investor (seller) had only held on to the property for 4 years while the worst performing investor had held it for 15 years.

3) Now you can also pick any investment timeframe (in years) and see how much return (in %) was made = for instance, along the 14 years held line, the best investor made 100% while the worst investor made just a bit more than 10%! Likewise, along the 2 years held line, the best investor made some 90% while the worst gained again a bit more than 10%. Wonder what the investors-sellers who had held their properties for 14 years would think when they realized they were no better off, as a group, than those investors-sellers who had held theirs for no more than 2. 

4) What is that curving up line? The simple answer is that transactions below the line are better than those above it in terms of return % and years held prior to sale. Naturally, even among these better transactions, there are the best and better of the better.

A few caveats though: i) no checks had been made to verify if the reported figures were correct; ii) no implication or confirmation that the 82 transactions reported in the first 6 days of July 2011 represent or reflect the true state of the overall market; iii) return % were based on the difference between the acquisition and sale prices.

Nonetheless, assuming the above does reflect the investment reality, then what insights or lessons could be drawn?

First, being long term does not always pay off and investors need to decide which comes first: their virtuous long term investment images or their wallets.

Second, timing is IMPORTANT! Of all the holding periods, those who had held onto the properties for 8 years, yes, you’ve got it, from 2003 when the economy was in the doldrums plus SARS, had gained the most.

It is one thing that timing the market is an extremely difficult task, and perhaps an impossible task, but its impossibility does not make it less important or ignorable. Investment tactics such as dollar cost averaging are not exactly ideal though practicable.

Third, whether by luck and / or skill, picking the right properties is also important. Just pick any holding period and the spread between the lowest return case and the highest return case is very noticeable. While the macro average market performance indicates a 50% return, the property you picked could fetch as low as say 0% while your friend or foe might actually enjoy 100% with theirs.

If any criteria are to be used to judge investors, it should be on whether they play fair and square, not long or short.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute 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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