Radical reforms needed to end the 'Rising PRH waiting time' myth 20220520

Radical reforms needed to end the 'Rising PRH waiting time' myth

After the Hong Kong Housing Authority (HKHA) announced the latest Public Rental Housing (PRH) statistics, showing that the 'average waiting time' has risen to a new high of 6.1 years, cliché-ridden editorials predictably rattled the same plattitudes about the 'need to increase supply for PRH' to address the problem, such as:

SCMP: Average waiting time for public housing flat in Hong Kong rises to 6.1 years, highest in more than 2 decades

The Standard: Waiting time for public housing rises to 6.1 years, hits 23-year high

The truth of the matter is not what it seems as claimed the housing bureaucracy (which is primarily responsible for the crisis), and the uncritical media. We have addressed this fallacy in extensive detail in the following article:

"HK’s Ever Ballooning Public Housing Addiction Cycle 05/2021" 

1. Lowering thresholds leads to perpetual shortage in housing welfare
2. Drastic cure: cut income limits, halt all public housing building
3. Wanton lifting of welfare thresholds crowds out private market

as well as some earlier writings (in Chinese only):

《公屋改革面面觀─結構性自我膨脹  2014年9月》English translation

《公屋改革面面觀─公屋「豪宅化」2014年10月》English translation

In essence, the long 'waiting time' phenomenon is a self staged smoke and mirrors game, which resulted solely from the ever rising income ceiling for public housing applicants, which significantly outpaces the increase in median household income for the population at large.

As a result, ever large swathes of the population fall into the eligibility net, thereby lengthening the waiting time unnecessarily. Coupled with this, the constant growth in average size of flats occupied by PRH occupants, the pursuit for luxurious standard for what should be a welfare product, have attracted even more applicants seeking this freebie.

The resultant rent seeking free-for-all only punished the tax payers and the genuine hard up applicants who are edged out of the housing market while the bureaucrats and rent seeking committees/advisors build their empires. In the meantime, the cancerous growth in public housing removes our ability to buy our own homes in the private market, thus becoming permanent slaves to the bureaucracy... a sad outcome indeed unless the reforms we outlined time and again are implemented.

UK property – time to sell? [Article 2 of 2] 20220520

 

UK property – time to sell? [2 of 2]

In this second instalment discussing the property investment pros and cons for the UK, we will look more into the geopolitical and regulatory aspect of the investment environment:

4) Warfaring disrupts business, causes capital flight (to US/Asia)

The Ukraine conflict is perhaps just the beginning of a reversal of human war cycles, as we have bounced off the bottoms of more than one multi-millennial support lines in the early 1990s:

Chart 17: conflict fatalities may have hit long term bottoms and is turning up

As the peace dividend from the fall of the communist bloc in 1989 recede into distant memory, could a new war hungry political set up be now in place to drive conflicts going forward? Is the ascent of a new economic super-power posing enough challenge to the existing order to lead to more hostilities?

With no ideological strive a la Cold War style (ie between communism and capitalism), what might be the next bone of contention in conflicts? Could it be domestic politics driven where international wars are mere diversions to avoid power loss at home? Could the jaw dropping inflations in commodities prices and food/energy shortages lead to resource wars?

We are now certainly in need of preparing, investment-wise, for a new multi-polar world, and the upheavals the breakup of existing order ushers in. One way to avoid being caught is definitely diversifying capital away from the main players of such conflicts (eg Europe, or even parts of North Asia – e.g. Japan).

UK, sadly sits too close to one of the main theatres of hostilities, and taking profits on existing exposures may not seem too bad a thing to do! Further, without the resource back up that some of our new target markets – mostly commodities rich ones – are endowed with, UK is less well positioned to weather the storm ahead:

Figure 1: Europe + Asia heavily rely on energy imports (red) vs Americas + Oceania (yellow/green) net exporters of the same

5) Chasing out the rich – has the selling only just begun?

The fervent confiscation of private property owned by individuals (see: indiscriminate seizures), who are not state operators in the strict sense of the definition, could be a last straw for any international investor considering the UK, as the current govt embarks on a capital hostile regime only seen during wartimes. Seizing Russian wealth without due process could be very dangerous for the country’s image as a safe destination for investment, and harks back the harsh Japanese imprisonment camps on USA mainland in WW2, not to mention what communist regimes did after successful revolutions (eg in Russia in 1917, China in early 1950s).

Whilst the ‘totalitarian’ enemy are abstaining from similar tactics, despite easily in position to confiscate western assets many times larger in Russia, the fact that a now ideologically driven UK takes the lead within the international community in asset forfeitures, without official declarations of war (which must be authorised by parliament?), or due criminal court judgments, really bodes ill for the future of London’s ability to attract investment.

Is it any wonder then that Superman KS Li (Hong Kong’s richest man) has sold in Dec 2021 his London Broadgate investment after barely 4 years of ownership for £1.25bn (a mere gain of 25%)? The fact that Cheung Kong often leads the market in catching cycles has been legendary and was amply illustrated by its HK$40.2bn sale of The Center in HK in 2017 which was mocked at the time but today its buyers are licking the wounds of their 25+% losses. Perhaps Mr Li has similar assessments on the deteriorating investment construct that is UK? Not only that, CK has further ramped up its UK disposals by flipping the much larger £15bn rump that is its power assets in March 2022 to Macquarie and KKR (see here).

The investment and jobs that would otherwise have stayed in the UK in the years ahead will now go for places less mob like, and more even handed, like Dubai (see article here). As succinctly observed by another commentator:

while many cheer the asset forfeiture of the evil Russian oligarchs, other nations can and will use this new tactic of war in the future. ... How could anyone feel safe investing in a Western nation if their assets will not be protected?

Western governments have exposed themselves throughout this pandemic, especially by letting us0 know they are not above coercion and silencing free speech [eg curfew in Australia, bank acc seizure in Canada, big tech cancelling of dissenting medical evidence]. The wealthy citizens are always the first to flee when a city or nation is failing.

this will totally destroy the world economy as we know it. Foreign investment in Russia will be seized, and the prospect of this migrating to China is extremely high. A line has been crossed. You do not go after the assets of private individuals claiming they are holding personal money for Putin. That would be akin to saying someone was holding money for any politician simply because they live under that leader’s rule.

This is a symptom of a major trend shift, and could mean a structural loss for most of the traditional Western cities in their ability to attract wealth in future from the Arabs, Chinese, Indians, and of course Russians…

Just to show how significant foreign capital is to the London market, see how much they have multiplied over the 11 years to 2021:

Chart 18: Land Registry titles with individual overseas owners – London a magnet for foreign capital

The 100s of thousands of property owners that felt UK was a safe place to park money may now have doubts and start heading for the exits, especially when the hostile political sentiment towards foreign owners continues to escalate (e.g. in the fashion shown in Figure 2). Capital has no loyalty, and will head where it is treated best.

Figure 2: UK no longer a safe haven for foreign capital?

We suspect that as China sides with the opposite side of the UK political narrative in this Ukraine conflict, it could be sooner rather than later that Chinese money (eg including investors based out of HK) would also be targeted for sanction/confiscation in this new norm of attack on private property. What if Taiwan becomes the next geopolitical hotspot? Will it be too late to pull out then? May be this is what Mr Li saw that prompted his disposal of UK assets?

6) Regulations Overload is becoming unbearable – for property investors

The assault of regulations on property ownership has been quite relenting in the past decade, as we have outlined in detail before here. But this has not stopped since, as the multiplying demands for compliance keep mounting, examples include:

a) Property selling now requires AML declarations, what red tape rationale is this? Below is a form from our property agents:

Figure 3: onerous form filling and reluctant law enforcement is now daily chore for landlords

b) Our accountants wrote to us below as they are no longer able to pretend compliance costs are negligible and will charge extra for sharing the burden:

You will note that the letter includes reference to a Compliance Surcharge which is a new item. You will undoubtedly be aware that all professional firms face ever increasing regulation and scrutiny, requiring a significant amount of additional staff and 3rd party resource to deal with matters such as:
• Anti Money-laundering legislation in onboarding and monitoring our clients
• Anti-bribery and Facilitation of Tax Evasion legislation
• Data Protection and GDPR requirements
• Increased regulatory compliance visits from professional bodies
• IT & Cyber Security

For some time now, we have been looking at the basis upon which we charge our clients. It is no longer sustainable for us to absorb these costs, which outstrip inflation in terms of growth.

…and apply a 2.5% Compliance Surcharge to our fees, as a direct contribution to these costs.

c) Green costs – the new ambitious EPC requirements could set back £13k-27k depending on the work needed for Grade D/E buildings, for details see article here; Hamptons calculated that in the North East, necessary upgrades would be equivalent to 83pc of the region’s annual rental income, according to Telegraph;

d) Green costs for commercial property too – according to Savills, proposed Department for Business, Energy and Industrial Strategy (BEIS) framework would ensure that all non-domestic rented buildings achieve a [even more stringent] minimum ‘B’ rating by 2030… 87% of the office stock has an EPC rating of ‘C’ or below. This is why we have also started disposing our commercial property in London on behalf of a client syndicate.

e) tax compliance becoming cumbersome – a prelude to much harsher regime to come? Here is an example of a form that non-resident landlords have to file to the HMRC, which no doubt will continue to lengthen going forward:

OVERSEAS BUYERS OF UNITED KINGDOM PROPERTY
RESIDENCE INFORMATION

During the Year:

Did you have a home overseas? Y / N
How many days did you spend in the UK?
How many ties** to the UK did you have?
How many workdays did you spend in the UK?
How many workdays did you spend overseas?

** Ties to the UK are defined as follows (references to "tax year" mean the year ended 5 April 2022) :
    1 Your spouse / civil partner / cohabitee or minor child was resident in the UK
    2 You had accommodation available in the UK for 91 days or more in the tax year
and you spent at least one night there
    3 You worked (for 3 hours or more) in the UK on 40 or more days in the tax year
    4 You spent more than 90 days in the UK in either of the previous 2 tax years
    5 You spent more "midnights" in the UK than in any other country

This body of complex requirements sets a costly trap for anyone who enjoys the English summer too much, or having sent kids to study there, not to mention those going for business purposes…

7) Demographics less bullish

Post-Brexit, UK's population growth should significantly slow, meaning lower pressures on the otherwise very tight housing supply (Chart 19), with the impact of EU citizens returning home a yet to be quantified negative factor:

Chart 19: very tight supplies in UK may unexpectedly ease

Further, lockdowns also repelled a lot of international visitors (reduces demand for Airbnb / short stay), added to that student population drops from China (geopolitics), there may be more unexpected release of stock otherwise unavailable.

As a result of all of the above, we believe the UK market will face much stronger headwinds going forward, and better risk adjusted returns may be had in other jurisdictions. In any case for the optimists, we present another technically derived upside forecast as well, indicating possible rise of 14% (orange line) vs the most bearish case of 21% price drop (blue line):

Chart 20: technical forecast scenarios: -21% to +14% by end-25

Obviously, a lot of Hongkongers want to continue holding UK property for asset allocation reasons rather than return maximising trades. For all B&MM clients who feel action is needed as a result of this series of articles, we do provide such services.

Where to go next?

'Go East' is probably the answer, if you compare the world reality of barely two decades ago vs now (Figure 4); but if China risk is not your cup of tea, then derivatives thereon (including commodities jurisdictions that feed that growth) could well work... In the short term, however, capital flights from Europe (or even Asia) could mean USA might be the ‘least dirty of shirts’ in a world so screwed up with unparalleled amounts economic dislocations, political divisions, and military risks.

Figure 4: Asia and commodities are probably the lands of plenty in the long term

 

The author would like to thank Benson Kong Yu Chin of The Hong Kong Polytechnic University for assisting in data collection, analysis, and drafting of this article.

香港公營房屋：改革一日不行 誇張報道無終 20220520

 2022年5月20日 宇論

改革一日不行 誇張報道無終

房委會3月底公佈新一輪的公屋輪候時間，直指申請者比前年的輪候時間增多0.1年。各大媒體如常一樣，驚慌失措不乏，義正詞嚴有之。表面社評/論述大多陳腔濫調，繼續因果掉轉，諸如：「要解決公屋輪候問題，最好增加更多過渡性房屋和公屋」之類：

輪公屋要6年 23年高 長者單人排4年 團體料未見頂_明報

公屋輪候增至6.1年 料「未到頂」_星島日報

團結基金料公屋輪候時間仍未到頂_信報

實情這些報道只顧聚焦供應，卻忽視真正原因，大有誤人誤己之效。筆者藉此機會，將過往數度分析公營房屋弊端之文章集腋再佈，希望拋磚引玉：

《公營房屋膨脹無盡干預毒癮欲罷不能  2021年11月》

1. 門檻低政府自製　公屋荒後果必然

2. 上限降 撥亂反正　公屋停 因時制宜

3. 收入上限不停瘋漲　私樓市場屢遭侵蝕

《公屋改革面面觀─結構性自我膨脹  2014年9月》

1. 過度推高入息限額——福利包袱無限膨脹

2. 入息限額機制急須大修

3. 私人市場更能解決問題

《公屋改革面面觀─公屋「豪宅化」2014年10月》

1. 每戶人數：公屋已較私樓更寬鬆

2. 人均面積：公屋豪宅化

3. 需求數字「發水」：歸咎「非長者一人」申請

簡言之：公營房屋之收入上限增幅長時大幅高於收入中位數、導致「需求」無理膨脹。同時公屋住戶平均人數下降、面積擴大、質素飆升引致更多中上階層輪候公屋，搵其著數。此一尋租劣象卻令真正有需要基層市民望門興嘆，同時房屋官僚不斷攻城略地，將私人市場逼向牆角，如此官進民退的現象實非本港經濟、公義之福矣。

UK property – time to sell? [Article 1 of 2] 20220513

 

UK property – time to sell?

UK has been a good market for many HK investors, especially those who bought after the lows of GFC. Your writer has done even better by focusing on fringe markets which continued rising even when the prime central London sector crashed since its peak in 2014 – some popular development projects there having fallen by as much as 50% since:

Chart 1: prime central London underperformed by 14% since 2014 peak vs Greater London…

But with a plethora of negative factors now taking centre stage politically, economically, climatically, and on valuation grounds, we think the prospect of future rises, let alone outperformance, of the UK property market, is now much dimmed. Below is an extract of a longer piece we sent to clients, some key reasons for our cautious views are as follows:

1) Energy / food / hyperinflation => drop in real income, rise in civil unrest

2) Debt explosion + Rate surge undermining returns

3) Taxes must rise to service the rising rates, unsustainable welfare, and military spending

4) International wars cause capital flights (to US/Asia) and disrupt business

5) Chasing out the rich – the selling has just begun? e.g. Superman Li. The Saudis, Russians, and Chinese may not return if the seizure of private assets continue

6) Regulations Overload is becoming unbearable – for property investors

7) Positive immigration inflows may reverse after Brexit

Below we will look at all these factors in more detail.

1) Massive energy/food inflation drains disposable income, may trigger civil unrest?

The UK/EU construct, being heavily manufacturing and trade dependent, cannot afford to lose reliable and cheap energy imports, which was badly hit by supply shortages following covid lockdowns. This is now worsened as geopolitical tensions explode.

Just about every essential commodity, manufactured good, and service (eg imported labour) is now at critically low levels, stoking massive price hikes sometimes in triple digits. For example: reserves of arabica coffee, the higher-quality bean loved by espresso aficionados, have fallen to their lowest level in 22 years… prices on the ICE futures exchange rallied as high as 2.55 in Q1, up 140 per cent from 2020 lows:

Chart 2: Coffee inventory at multi-decade lows, and could worsen further as fertiliser/transport costs continue spiking

There has been widespread coverage of the energy shortage and price spikes so we will not go into detail here, one example being ominous The Telegraph warning on 18 Nov 2021 – well before even the Ukraine conflict broke out:

We are back to warnings of power rationing and industrial stoppage, a looming disaster for the European Commission and the British government alike

[Gas] Inventories are currently 52pc in Austria, 61pc in Holland, 69pc in Germany at a time of year when they should be near 100pc

Chart 3: UK less affected by Russian imports, but still can’t escape rallying global prices

UK is not as safe as the chart above suggests, as cross-Channel prices move in near lockstep, and the fact that the government allowed storage sites to close means the country may be nakedly exposed with just days of stock.

Further, the Hinkley Point C nuclear power station will not come on stream for another five years at best, and have banned, since 2019, fracking to extract easy oil resources.

Edging private sector to invest in fossil fuels is now more difficult than ever: ten years ago, the "cost of capital" for developing oil and gas was similar to renewable – at between 8% and 10%. Now, the threshold of projected return that can financially justify a new oil project >20% for long-cycle developments, vs renewables falling to 3%-5%, according to Goldman Sachs.

Chart 4: Cost of capital: very costly to start fossil fuels projects due to politics and ‘green imperative’ mentality

Why so high? Simple. Few want to lend to fossil fuel producers as stakeholder capitalism, ESG mandates, and identity politics infest corporate boards.

2) Debt explosion + Rate surge undermining returns

The West has sleep walked into a vicious cycle of:
(a) high welfare =>
(b) higher debt =>
(c) higher taxes when can’t borrow =>
(d) cut interest rates to -VE when can’t raise tax =>
(e) to buy political support, increase welfare (ie back (a))

This trick was easy to pull off from the early 80s when interest rates were as high as 15%, but now with EU at negative rates compounded by massive inflations every way you look, the game is OVER.

A slight increase in rates – when EM countries are now well equipped, after having gone through their own versions of debt crises (eg Asian Financial Crisis) – will cause the West into a painful reverse trade that threatens to rapidly unwind the past 40 years’ profligacy.

In the case of the UK, public debt has gone from 20% of GDP to 100% over 30 years (Chart 5), but all while interest payment fell from 10% of revenue to 3%. All of these are coming to a head now with collapse in confidence in public debt, triggered by govt mandated economic lockdowns, zealous push for green agenda, and now international wars:

Chart 5: UK public debt as post-war highs
Chart 6: Thanks to rate manipulation

The optimistic forecasts of OBR are probably based on low rates, low inflations, and strong growths after coming out of the lockdowns, but all of these assumptions are severely challenged, which could mean a debt explosion from the highest level since the 1960s to much higher levels than forecast below:

Chart 7: UK debt forecast likely too optimistic

Coupled to this the economy destroying zero-carbon ideology feverishly pursued by most of bureaucrats and politicians, the UK could see as much as 60ppts more in debt load in the next 30 years:

Chart 8: Climate change scenarios: public net debt impact by 2050-51

As international interest rates head higher, the ability of the slow growing OECD (mostly EU) to hold down their risk free rates will evaporate, as capital leaves seeking better returns elsewhere – all of this will lead to much higher finance costs for property very soon. The strong inflation backdrop (Chart 9) is also probably grossly under-estimated by the market, where low to mid single digit forecasts are still the norm, when we are already potentially looking at as high as 20%s levels (especially the 70s oil shock pattern repeats):

Chart 9: with war added to the mix of energy + food crisis, we fear UK inflation could reach double digits soon

Chart 10: Fed projected to hike 300+bps in next 1.5 years

If The Fed’s hike trajectory (300bps in 12 months) is anything to go by, given a weaker GBP (which means more imported inflation) plus higher energy uncertainties compared to continental USA, 400bps+ rate increases are a high probably outcome to us:

Chart 11: yield gap analysis suggests possible price falls

As a result, even modestly assuming 300bps mortgage rate hike (Chart 11), the low property yields of today will feel a lot of pressure to catch up. Expanding yields mean higher rental growths are needed (69% in above scenario) just to keep prices from falling!

3) Taxes must rise to serve the rising rates, unsustainable welfare, and military spending

Part of the problem of high inflation and high interest rates is the erosion of profits at the corporate level and take-home pays at the individual level. It is no wonder that the government’s own forecast project the highest tax-to-GDP level since WW2 (Chart 12), adding insult to injury after the first two drags on people’s income:

Chart 12: tax take as % of GDP up 8ppts from 80s lows

Chart 13: 2019/20 to 26/27 tax increase by factor

All of this is in addition to the economic rebound nearing its peak, when corporate expansion intensions are starting to reverse:

Chart 14: CFO expansion survey – growth may have peaked

As rates rise, and inflation and tax bite, people’s take-home pay will likely drop, leaving them less money to invest in property, and we expect the record high P/E ratio (home price to earnings) to also turn south (Chart 15), perhaps having first made a dash for new highs by as late as Q3 2022:

Chart 15: Home price to income ratio also may peak by Q3 22

Looking at the complex picture in one condensed chart, we factor in income growth and interest rises against real home prices (ie after inflation) below, we present two possible scenarios:

1)      optimistic outcome where home prices stay unchanged (blue solid line, Chart 16) - the combined effect of inflation and income growth will make home prices a lot more affordable by 2026 (red sold line);

Chart 16: yield gap analysis suggests possible price falls

2)      but what if the cycle we see in the red line repeats itself, and the red dotted line plays out by 2024 at the 700 reading on the real home valuation index? Such an outcome would require a home price drop of 37%, as represented by the blue dotted line.

The only possibility for home price drops not to happen is if income rises more than inflation (unlikely) and rate hikes are much less forceful than we forecast (also not high chance)…

Although our forecast contains a lot of forward assumptions, what we know for sure also is that the market has been too blasé about how the govts and central banks will be able to keep everything on a steady straight line (very typical mandarin thinking).

In the next instalment
Our discussion will continue in a second piece shortly, in which we will go back to more descriptive mode and go through some of the more real life examples of how and why owning and investing in property in the UK is now much more an uphill struggle compared to the ease it used to be barely 10 years ago... This aspect will very much weigh on the global collective sentiment towards this asset class going forward.

The author would like to thank Benson Kong Yu Chin of The Hong Kong Polytechnic University for assisting in data collection, analysis, and drafting of this article.