Dubai property, Hong Kong property

Move over Dubai - Hong Kong property is better value

07.02.2008

by Jody Clarke

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When a property developer starts handing out free BMWs and Bentleys with every apartment sale, you can be sure that a property bubble isn’t far off popping.

DAMAC, a Dubai based property firm is giving away a free car with every commitment to purchase an apartment over the next three weeks. And according to Mohammed Ouhitt at its Mayfair office, you won’t just get any car. A studio or one-bed apartment, starting from £120,000, comes with a BMW 1-Series, while if you nab one of its signature penthouses you’ll be driving home in a Bentley.

It seems crass and desperate, but you can understand DAMAC’s logic. Sentiment is beginning to turn against the city’s property sector, as visitors to the city begin to realise that a building site-cum-beach, ski and shopping destination, where Blackberry-touting, sharp-suited corporate lawyers mix freely in hotel bars with Bermuda short-wearing 40 somethings, isn’t exactly an ideal tourist destination.

Or a place to buy a holiday apartment...

"A bubble just waiting to burst"

Indeed, according to almost half the respondents in the latest arabianbusiness.com survey, the Dubai property market, which soared 19% last year, is a “bubble just waiting to burst”. Another 25% said that the market does not offer any real long-term value, and is “obviously going to decline.”

According to Global Property Guide, Dubai is swamped with new properties to be delivered in 2008 and 2008. “A slump in demand from international buyers due to a global economic slowdown could exacerbate the problem. The speculative nature of its housing market makes Dubai highly susceptible.”

“There is a confused feel about the place” says even the famously bullish Stuart Law, of property company Assetz, where “families on holiday mix with businessmen in suits. I was stuck there on a dusty street, waiting for a taxi with building going on everywhere, thinking, why on earth would anyone want to come here on holiday? There’s a million other places you could go.”

Why Hong Kong property looks much healthier

And if you’ve got a spare few bob, Hong Kong should offer a lot more value than the dry windswept streets of Dubai. Housing transactions are soaring, as mortgage rates in the former British colony go negative. They are now below the rate of inflation at 3.8%, as the city-state is forced to slash rates almost in line with the US Federal Reserve. This is because its currency is pegged with the US Dollar. And although Bernanke and Co. over in Washington are surely fuelling another almighty global asset bubble, this is one which shouldn’t burst just yet.

"Mass market property prices are still 35-40 percent below their peak in 1997," after which they dropped 65%, says Nicholas Kwan, Asian head of research at Standard Chartered Bank on Reuters. "So even if they rise 30-40 percent, prices would only be what they were 10 years ago," he said. "It's hard to argue that would be a bubble."

Indeed, in the next 2 years, one Merrill Lynch analyst has predicted a 50% jump in property prices, as the booming Chinese economy continues to drive the Hong Kong market along.

One of the best ways to access it is through a REIT, many of which are now have attractive yields. These include Sunlight REIT (0435HK), on a 5.6% yield, a Prosperity REIT (808HK), trading on a forward p/e of 32, Hysan Development (14HK), a property development company whose properties include commercial rental and luxury residential buildings in Hong Kong. It's trading on a forward p/e of 25, while Regal Real Estate Investment Trust (1881HK), a REIT investing in hotel properties is trading on 16 times forward earnings. Shares in Real are now trading hands at HK$2.08, but Paul Yau at Merrill Lynch and Gregory Lui at Deutsche Bank both have price targets above HK$3 for the stock.

Turning to the stock markets...

(Article continues below)

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Broadcasters lead FTSE gains

London's FTSE 100 index added 7 points to close at 5,875, as a triple-digit rally on Wall Street gave the index an afternoon boost. Broadcaster BSkyB added over 7%

after announcing better-than-expected results for the first half. Peer ITV also benefited from talk of private equity interest. For a full market report, see: London market close.

Elsewhere in Europe, the Paris CAC-40 added 39 points to end the day at 4,816. Over in Frankfurt, the DAX-30 was 82 points higher, at 6,847.

On Wall Street, an early rally was broken after Philadelphia Federal Reserve President Charles Plosser spoke out against aggressive rate cuts. The Dow Jones gave up triple-digit gains to end the session 65 points in the red, at 12,200. The S&P 500 was down 10 points at 1,326. And the tech-rich Nasdaq lost 30 points to close at 2,278.

In Asia, the Japanese Nikkei added 107 points to end today's session at 13,207. China and a number of other markets are closed until Monday for the Chinese New Year.

Sterling falls ahead of rate decision

Crude oil futures had edged slightly higher today to $87.16, having fallen over $1 yesterday after government figures showed inventories had risen more than expected. In London, Brent spot was at $88.06.

Spot gold had risen to $908.00 this morning although trading was light due to the closure of many Asian markets. Platinum hit a new record high of $1,820. And silver had risen to $16.64.

In the forex markets, sterling was lower against both the dollar and the euro, at 1.9576 and 1.3373 respectively, ahead of the Bank of England's interest rate decision later today - widely expected to be rate cut. The dollar was at 0.6829 against the euro and 106.46 against the Japanese yen.

And in London this morning, BT announced a 2.6% rise in third-quarter operating profit as job cuts made up for slowing sales growth. The telecoms company has been slashing about 5000 jobs a year. Shares were down by as much as 5.5% in early trade.

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