posted on 19 Sep 2014

Categorizing Property Listings

In order to promote the sale or rental of your home, your real estate agent buys advertising space in media channels, including classifieds, print, Internet portals and digital co-broking networks.

In industry parlance, these advertisements are called property listings.

According to HRX data, there were over 53,000 listings in August, yet there were only about 4,800 sales transactions for private homes. This translates to more than five listings for every one transaction after factoring in that a typical home takes 2 months to sell in today’s Cooling Measures environment.  

How can there be so many advertisements for so few transactions?

The answer is simple but not well-known by the general public: Not all property listings are equal.

By our count, there are three categories of property listings. Furthermore, within these categories, their quality can vary dramatically.

As an educated consumer, it’s important to understand the different categories so that you can interpret the property listings and separate the wheat from the chaff.

Remember that listings are a critical part of the transaction process. Not only does the listing promote a home, it also provides the asking price or rent that, then, becomes the starting point for negotiating the final price of the home. As such, properly interpreting a listing is essential to finding the right home and then negotiating the right.  (More on this in later columns.)

The three categories of property listings are exclusive, open, and sold.

An exclusive listing means that the agent retains the sole right to represent the seller regardless of who finds and secures the buyer.  

An open listing means that the seller has engaged one or more agents but has not granted an exclusive. Whoever completes the deal earns the commission.

HRX estimates that more than 80% of open listings are duplicates. A duplicate listing means that there is at least one other listing for the same home. One reason that there are so many duplicates is that agents work on commission. As a result, the cost to engage many agents is the same cost of employing one since the seller pays only one commission.

However, the relationship between an agent who has an open listing and the seller is usually not as strong as that of an exclusive agent.   As a result, an open listing agent may experience some difficulty in representing the home well, which could lead to obstacles in viewing the property, negotiating, and conducting a proper due diligence in an efficient manner.

The final category of listings is a sold listing. This is a listing that has been validated as sold by member companies of the HRX. It’s a way for an agent to demonstrate his or her track record, and is common practice in many industries, including investment banking. A sold listing is informational only.

In summary, the reason that the Hong Kong real estate market has such a high number of listings to transactions is that there are many open listings that are duplicates. This leads to inefficiencies in transacting property. In next week’s column, we will show you how to ascertain the quality of a listing in an effort to bypass the market’s inefficiencies.


posted on 15 Aug 2014

There are two ways to make money in real estate:  capital appreciation and rental income.

In our last two columns, we discussed how to buy, finance, and sell property to achieve your goals for capital appreciation.

Today, we will break down the basics of earning money from residential rentals.

Gross rent is the money you receive from tenants occupying your property.  In Hong Kong, the typical rental lease is two years.

The trick to earning income from a rental is to have money left over after you have deducted the following from the gross rent: cost of financing (i.e., mortgage principle and interest payments), renovations, maintenance, taxes, and other miscellaneous expenses.

This is easier said than done.  As a landlord, you must contend with many variables, including market conditions as they pertain to rents and occupancy rates; the behavior of your tenants; and the challenges of managing your costs.

In future columns, we will breakdown the major drivers of rental income - market, tenants, and expenses – in greater detail.  However, as a preview, we would like to highlight several important considerations for each driver.

First, the market will determine the gross rent you can charge. This becomes the ceiling in which you need to cover your costs. The height of this ceiling will depend on how well you understand the supply and demand factors that pertain to your property and its comparables.  This means you must become an expert in the rental market.

Second, you will want to develop a strategy for servicing your tenants. Renters are like customers in any consumer business. They come in all shapes and forms. Some are pleasant while others are demanding. Some pay on time while others are perpetually in arrears.  Some tenants care for rentals as if it were their own, while others treat rentals as if they were youth hostels.

Third, as is the case with any business, you will need to manage your costs. Every cent you save is more money in your pocket. This requires you to strike a balance between your tenant’s requirements and the constraints of your budget. For example, you will need to renovate the rental just enough to attract the right kind of tenant but not enough to create a loss-making situation.

At this point, you might be asking who would possibly want to be a landlord?  Sounds like hard work.  

For example, specialist real estate agents, lawyers, and tax accountants can guide you along the way. If you select good ones, they will pay for themselves many times over.

Making money in the rental market is no sure thing. However, if you master the key drivers – market, tenants, and expenses – you will be in a good position to generate a long-lasting income stream.

posted on 25 Jul 2014

Last week, We focused on the importance of location and leverage in improving the capital appreciation of real estate. In this column we will share our thoughts on when to lock in capital gains. Also, we will address the conundrum of reinvestment risk.

It is difficult to time the property market and plenty of people have been hurt trying to do so. Greed and Fear dupe us into making poorly-timed transactions. Serious investors and homeowners know this to be true. (We will make a detailed case for why this is true in a future column.)

Smart investors and homeowners don’t believe they can identify the perfect time to sell. Instead, they sell when their objectives are met. They know that if they let emotion trigger the sale, they will get burned more often than not.

The best time to set your objective for selling is actually as soon as you buy the property. You should have at least a vague idea of how long you plan to hold it. Of course, you can adjust your objectives to accommodate changes in your personal and financial situation, but you should never allow short-term market movements to influence your selling decision.

Your objectives are likely to fall into two buckets: lifestyle and financial.

When you set a lifestyle objective, you are aligning home ownership with the various milestones in your life. This includes marriage, children, upgrading, downsizing, and retirement. The trigger for selling your home is when that milestone approaches. If you plan properly, you can generally give yourself plus or minus a year so that you can sell in an environment that is more favourable to you.   It is important to note, you are not timing the market. You are just giving yourself enough flexibility to wait out a temporary and predictable downturn, like a period of Cooling Measures.

Also, you are untroubled about whether you are selling at the peak because you bought the property at fair market price, held it for a number of years, and sold it at a good appreciation. You don’t worry about whether you could have sold it for more at a later date. The important thing is that you achieved your lifestyle objective.

The other type of objective, which is more typical of investors, is the financial one. Here, the investor sets a quantitative goal at which he will sell when he reaches it. For example, you might establish a goal that includes a five year rental yield of 4% plus an annualized capital appreciation of 10%. You would not have arbitrarily plucked this out of the air. You would have arrived at this after careful analysis of the potential of the property over different periods of duration, considered your financing options, and assessed the risk using sensitivity analysis.

If you are a disciplined investor, you will sell when you achieve your financial objectives, even if the market is hot and Greed is encouraging to hold onto the property for longer.

Assuming you have achieved your lifestyle or financial objectives, when you sell, you will be faced with reinvestment risk, especially when the market is overheated. Reinvestment risk refers to the possibility that you will not be able to find a new investment that will give you the same type of return as you just received.

This places a burden on you as a new buyer to apply the same type of discipline as you showed when you purchased your previous investment.

As discussed in earlier columns, this means you must do your homework to identify homes that give you the greatest potential for future, fundamental appreciation. This work must be done before or while you are in the process of selling your current investment.

While you cannot time the market, you can time the sale of your home to when you meet your lifestyle or financial objectives and while you are setting yourself up to succeed in your next investment.   This is called reducing your investment risk.


posted on 14 Jul 2014

There are two ways to make money in real estate: capital appreciation and rental yield. 

In today's column, we offer some brief thoughts on capital appreciation. In future columns, we will discuss reinvestment risk, rental yield and some factors to consider when investing in the Hong Kong real estate market. 

If you sell your home for more money than you paid, you earn a one-time capital gain. If you lose money, it's called a capital loss. 

In evaluating a real estate investment opportunity with the objective of achieving a capital gain, it's important to analyze the home's potential for appreciation and how you can use leverage (i.e., mortgage financing) to supercharge your return. Before you sell the home, you must consider reinvestment risk. 

In evaluating a home's potential for appreciation, location and relative price are the most important considerations. Look for homes in both well-established and up-and-coming neighbourhoods. Your real estate agent can provide you with HRX information that will help you identify neighbourhoods with a solid track record in capital appreciation. Take The Arch for example, this project have an annualized capital gain of 8.9% since it was launched. Also, your agent can help you identify neighbourhoods that hold great promise because of upcoming rezoning and development. 

Once you have identified a high-potential neighbourhood, search for homes that are relatively underpriced compared with other units in the same project or in nearby buildings. Often homes sell at discounts for temporary reasons or because they need work. For example, nearby construction, especially when it is next door, often scares away would-be buyers and depresses the price. Use the construction noise as an excuse to negotiate the price down. Then, buy some ear plugs and watch your home appreciate as soon as the construction ends. 

Another important factor in thinking about capital appreciation is leverage. Borrowing money from the bank allows you to significantly reduce your cash outlay, shift risk to the bank, and juice your returns. A simple calculation explains why. 

If you pay cash, in full, for a $6 million home, you have placed $6 million at risk. Let's say one year later the market moves in your favor and you sell the home for $6.3 million. Your capital gain is $300,000, which gives you a return on equity of 5%. 

If you borrow $4,800,000 from the bank, then you have placed $1,200,000 at risk. (The bank enjoys 80% of the capital at risk in return for interest payments.). When you sell the home one year later, you achieve the same capital gain but, this time, your return on your equity is much greater. In this case, your equity is the initial $1,200,000 and your return is $300,000 minus, say, $60,000 in interest payments. $240,000 divided by $1,200,000 gives you a one-year return of about 20%. 

While this simple example does not include taxes, expenses, and other variables, it does illustrate the principle that you can earn a higher return at lower risk by using leverage. However, at this juncture, it's equally important to stress that leverage is a double-edge sword. Investors achieve success with leverage, but it can also burn them. Don't borrow more than you can comfortably pay back. Also, ensure that you have a cash reserve to pay your mortgage in the event that you are temporarily unable to make your monthly mortgage payments. 

At some point, every successful investor must decide when to lock in his or her capital gains. This is a much harder task than it sounds because of that dominant human emotion called greed. Next time we will share more on how to make the call. Also, we will address the conundrum of reinvestment risk.

posted on 25 Jun 2014

What are the three most important factors in determining the value of a home?  Location. Location. Location. 

This is an old real estate joke that has survived the years because there is so much truth in it.  

Another piece of advice that has persisted through time is buy the least expensive house in the best neighbourhood you can afford. 

Both of these ideas point to the fact that location is by far the most important of all the factors that determine the value of a home.  While the quality of a building and its interior impact price, it is the location that ultimately drives the value of a home.   

For example, savvy buyers and speculators are combing through Shatin in search of bargains that will rise in value as the area upgrades. As the accompanying graph illustrates, they see opportunities to buy at a dip in the price. 

Shatin is situated in an excellent location, surrounded by expressways with quick access to downtown and other points of interest.  The Shatin to Central Link (SCL) also serves as a key to unlock the potential of this area. All Shatin needs is some rezoning and a facelift, and it will be competing with the more fashionable neighbourhoods of Hong Kong.  

Other areas, like Diamond Hill and To Kwa Wan, are making their play for under-appreciated neighbourhoods that are up and coming. 

These neighbourhoods have several things in common.  First, they are located next to expressways and MRTs with quick access to places of work and shopping.  From a transportation standpoint, they are very convenient.  

Second, they are next door to better-known and more well-to-do locations.  This is very important because by buying into these under-appreciated neighbourhoods, you essentially get the same location but at home prices that are considerably less expensive.  

Third, they will eventually benefit from the Shatin to Central Link once it is completed. 

Also, the more affluent area next door will start to merge with your neighbourhood and pull its value up.  This means that before you know it, you are joking that your home has appreciated so much that you can no longer afford to buy it. 

That's a joke we can all hope for.