Considering property in Hong Kong? Tread carefully

Chart courtesy of Yahoo! Finance.

Investors looking for a respite from the disastrous American housing market may be seeking refuge in a global property market that’s still riding high, such as Hong Kong.

Not so fast.

Hong Kong has been experiencing some tumultuous times of its own: home prices have increased 13 percent this year on top of a 30 percent jump in 2009.

The government has taken a number of steps to temper the rocketing market, including increasing transaction fees on luxury properties, releasing government-held prime sites for auction and selling subsidized apartments to alleviate pressure on mid- and lower-income residents.

Hong Kong’s home price surge is based on the stars aligning on a number of fronts: the Hong Kong dollar’s peg to the U.S. dollar, which essentially ties interest rates to the Fed’s rock-bottom interest rate calls; Hong Kong’s robust GDP growth in the past two quarters – the government raised its 2010 forecast to 5 to 6 percent growth from 4 to 5 percent on Aug. 13 – and money flooding into the local economy by increasingly wealthy mainland investors looking to snap up property in the glamorous shopping mecca.

Investors intent on capitalizing on companies riding the property value surge should carefully consider the risk.

Third Avenue Management’s Third Avenue Value Institutional Class (TAVFX), a mutual fund made up of just over 35 percent Hong Kong real estate and investment companies, is posting a 5.4 percent year-to-date loss despite a solid investment strategy and seasoned management team. After rebounding strongly in 2009 after a disastrous 2008, Third Avenue Value is trending once again towards the bottom of the pile.

Morningstar Inc. analyst Bridget Hughes writes in a recent note, “Although the fund may not seem to be acting like itself, the managers are playing by the same rules that have brought shareholders superior long-term returns. That includes going against the herd to get good values and having conviction and exercising patience.”

Morningstar rates this fund as an above-average risk that will yield strong results with a 10-year commitment. Hughes seems to place some faith in the strength of co-manager Marty Whitman’s solid decision-making and depth of research: “[Whitman] wants to buy cheap companies, but he wants them to be safe. The strength of a company’s balance sheet is a key factor in his investment decisions,” she wrote in a recent note.

The Hang Seng property sub-index has been reactive to the government’s moves towards limiting home prices despite indications that the restrictions are having little effect. Last week, record acquisitions were made by Cheung Kong (Holdings) Ltd. on two properties purchased at prices 44 percent and nearly double the opening bid prices last week.

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