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Those Who Dare May Gain

David Chan, SCMP – Updated on Jan 21, 2009

Investment opportunities remain in the mainland property market despite the effects of the global financial crisis, and one emerging asset class that may reward investors are “green” buildings.

Part of the 4 billion yuan (HK$4.54 billion) stimulus package unveiled recently was earmarked for the development of greener buildings running on lower-polluting energy supplies and built with an eye to conservation and an environmentally friendly infrastructure.

What we may see in the near future are very different greener properties being developed which may offer interesting new investment opportunities.

Indeed, many recent homebuyer surveys indicate that green projects offering greater energy efficiency are becoming key deciding factors and this trend should encourage the development of a “green is good” approach to development across China.

It is worth noting that the initiatives are considered to go much further than provisions contained in Hong Kong’s proposed energy code which is scheduled for a first reading in the Legislative Council some time this year.

As always the three rules of property investment – location, location, location – also still apply.

However, investors should proceed with caution and an eye on the timing of their entry into the market because the general consensus is the mainland, Hong Kong and the rest of the world will experience a deep economic recession this year.

Less certain is how long the downturn will last and how severe it will be although by one measure – jobs – analysts are forecasting that unemployment in Hong Kong could reach 6 per cent this year.

The property sector is no exception to the list of casualties, with demand and prices dropping across the board.

So what will be the property investment outlook for the Year of the Ox?

First, it is important to bear in mind that the downturn has affected China with recent reports indicating that gross domestic product growth will slow this year to possibly below 8 per cent. This has already triggered declines of up to 30 per cent in property prices for commercial and residential markets in tier-one cities, and 20 per cent in tier-two cities.

In Hong Kong, we have seen an even greater drop of 40 per cent in luxury stock and up to 30 per cent in the mass market.

For example, China Vanke (the mainland’s largest residential developer by market capitalisation) has cut prices of projects in Guangzhou by 30 per cent and has also either slowed or suspended indefinitely construction on some projects to reduce inventory levels.

During the last downturn to affect Hong Kong – the severe acute respiratory syndrome epidemic in 2003 – property prices fell precipitously. Those buyers confident that the market would rebound used the opportunity to buy and as a result were rewarded with impressive gains as property prices rose to record highs last year.

So, presuming you are able to stay employed and have built up a nest egg over the last few years could this experience be repeated?

“Green” investment themes aside, location should continue to head investor’s shopping lists and Shanghai should not be dismissed since the 2010 World Expo will generate renewed interest in the property market. The completion of an upgraded and extended transport infrastructure (and more to come), will make property along the new metro stations attractive.

It is worth noting that the capacity of the Hongqiao airport will be vastly expanded by the completion of a second terminal building, enhancing its status as an air transport hub.

In Beijing, the areas which have been developed by Soho China are also of interest as is the site of the 2008 Olympic Games which is likely to be preserved as a landmark with its impressive bird’s nest stadium and water cube aquatic centre. This should have a knock-on effect for the neighbouring residential market.

Southward, development along the Guangzhou-Shenzhen-Hong Kong Express Rail Link, connecting Guangzhou, Dongguan, and Shenzhen in Guangdong province to Hong Kong, should be followed.

When completed, the expected travel time between Guangzhou and Hong Kong will be cut to 48 minutes.

In Shenzhen, the Baoan Airport railway link should help to transform the airport from primarily a domestic operation into an international hub, adding potential investment opportunities around the locality.

Conversely, it may prompt the Hong Kong government to reconsider the environmentally destructive plan for a third runway at Chek Lap Kok.

For second-tier cities, investors could look westward at Chengdu where the government has earmarked 260 billion yuan for rebuilding work for the region with the city as the centre of development activities.

While China will be affected by events internationally, it is worth noting that world economies are all interconnected and hence the flow of funds goes to markets offering relatively better stability and sounder economic prospects.

With the United States and Europe already into deep and possibly prolonged recession, China remains a comparatively better investment market in which fund managers may park their assets in the medium and longer term.

There is no escaping the economic downturn which is likely to affect Hong Kong and the mainland this year. However, returns are likely to be on offer for those investing in a quality project across the border.

The ox might still turn into a bull this year for those who dare.

David Chan is an architect and a partner of China-based property consultancy DKL Partners

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