DB-based Thorsten Allenstein advises on investing fundamentals.
T he Economist released the rankings of the most expensive cities in the world this March and Hong Kong topped the list, tying for first place with Singapore and Paris. Most Hong Kongers feel the pinch in the high cost of rent, and it only takes a few months before the idea of buying real estate seems like a good idea. So where should you begin?
1 Familiarise yourself with the MIP.
Due to the loan-to-value (LTV) caps put in place by the Hong Kong Monetary Authority (HKMA), buyers must have up to 50% of the property valuation in cash (for properties of HK$10 million or more). Fortunately, the Mortgage Insurance Programme (MIP), launched by the Hong Kong Mortgage Corporation (HKMC) in March 1999, is there to help buyers with this down-payment burden.
The MIP provides mortgage insurance to banks, so that banks can provide mortgage loans with a higher LTV ratio without incurring additional credit risk. If an application meets the relevant eligibility criteria, the bank can provide a mortgage loan of up to 80% LTV ratio under the MIP.
2 Get pre-approved for a mortgage.
Before you start looking for a home you should understand your credit history and how your bank will assess you as a borrower. In Hong Kong, properties can move extremely quickly, sometimes in a matter of days. So, when you find a great property, you want to be prepared to submit an offer with the deposit cheque during the negotiations. Being unprepared can lead to you losing the property or worse, submitting a deposit and then discovering your bank won’t lend what you had assumed.
3 Choose an ‘affordable’ location.
Discovery Bay is consistently popular for families and pet owners, and the prices per square foot typically lag Hong Kong Island by 10-15%. However, the Planning Department has designated DB as a low-density residential suburb, limiting the overall population to 25,000 upon full development. With a growing current population that is quickly approaching the limit, we are expecting demand to exceed supply in the short- to mid-term.
New developments in Tai Po and Tseung Kwan O are becoming popular for the relatively low price per square foot. Sufficient supply of ‘affordable’ new units ensures first-time buyers have options to consider.
4 Limit your renovations budget.
When renovating an apartment that you’ll live in, don’t forget that it is also an investment. The purpose of the renovation is both to tailor the unit to your desires and to increase its value. Over-investing in a renovation can lead to a loss of capital, if the investment isn’t realised when the unit is sold. A good rule of thumb is to budget 3-5% of the property price for renovation.
5 Consider investing overseas.
Property prices in Hong Kong are higher than virtually every other country and that, combined with the government’s LTV caps, can make the idea of investing overseas appealing. Property investment yields overseas (typically 4-6+%) are also higher than in Hong Kong (2-3%), albeit with lower long-term upside potential.
Tags: property, investing, okay.com, renovation, thorsten allenstein, economist, economy, location, overseas, budget, MIP, mortgage