[Finance Wiz @Daniel] Is property investment ideal for wealth inheritance?

[Finance Wiz @Daniel] Is property investment ideal for wealth inheritance?

[Finance Wiz @Daniel] Is property investment ideal for wealth inheritance?

FINANCE

2021-10-28

5  Mins Read

To many Hong Kongers, owning a property is a guarantee to a privileged life. With the belief that property values are bound to rise, and the capital appreciation will settle their retirement fund, we are seemingly convinced that investing in property could lead to financial freedom, or it is the best way for wealth inheritance. Therefore, many Hongkongers are working hard to save for the down payment to achieve this “benchmark of personal success”.

I agree that owning a property for the family is essential, especially when we are living in a small and densely populated city. Buying a self-occupying property should be encouraged as long as you can afford it.

However, from the investment perspective, is real estate, particularly residential property, a desirable way to invest in Hong Kong? Is it an ideal solution to grow your wealth?

 

Property prices haven’t even doubled for more than 20 years

The primary purposes for investing in a property are potential capital appreciation and stable rental income.  When we look into the Centa-City Leading Index (CCL), it now hovers at around 190 against the base of 100 as of July 1997. Although at a historic high, property prices haven’t even doubled in the past 24 years.

What is more worth noting is that investors have to also prepare for roller coaster rides. Looking back on the past two decades, CCL plunged to as low as 32 in 2003 when SARS ravaged. Even though the index did not fluctuate significantly during the COVID-19 pandemic and the trade war, it doesn’t mean values will not go down again with future events. Property investments are no smooth sailing.

 

Entry barrier rising; rental return squeezed

With property prices on the rise for numerous years, most residential units in Hong Kong are worth north of HK$6 million. Stamp duty for first property buyers is as high as 3.75%, while investors may also be responsible for double stamp duty for second properties or after. It now takes an initial principal of at least seven digits to buy an investment property. Adding up other miscellaneous expenses such as stamp duty, costs for property transactions are higher than most other modes of investments and will eat into any potential return.

One of the nice things about property investments, they say, is that the rental income can often cover mortgage repayment. Regardless, minus costs for property-owners such as management fees, the rental return at current price levels is generally below 2%. And don’t forget, rental income is taxable as well.

 

Liquidity is as important as potential appreciation

To sum up, with real estate investment, you may enjoy capital appreciation according to historical data. Yet, it does not turn out to be a very productive one versus other, more liquid assets such as shares and bonds. Moreover, there are always risks in investment and in real estate, those are location, environment, maintenance, tenant quality and more. From this perspective, property may be an attractive investment but not the silver bullet for all circumstances.

For sure, the Chinese people are very into the concept of “home”. For many, it is undoubtedly the choice for wealth inheritance because they can provide the next generation “tiles over their heads.” But with real estate, it would be technically tricky to allocate wealth “fairly” to several beneficiaries. If you don’t cash out the property, proper distribution cannot happen.

To look at other possibilities, some investment-based saving insurance plans may achieve a doubling of value every decade. If you invest in such policies with the same patience as real estate, it may be a good strategy for retirement and inheritance.

The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau

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