There will always be risks when investing in any property, shares, funds, etc. This is why you should always be aware of your risk tolerance to avoid losing everything in case something goes wrong with your investment.
Although it is one of the most expensive that you will make, investing in a Hong Kong property is usually categorized among the low-risk investments. After all, most properties will keep going up. Buying real estate remains to be unaffordable to most residents in Hong Kong.
This is why those who are lucky enough to be able to afford to invest in it can really benefit from rental yields. Not to mention the fact that real estate usually appreciates. Hong Kong may be going through a free fall in terms of prices, you can be assured that this will not be forever. It will eventually rise and this will help you gain more from your investment.
Of course, the promise that a recovery looms on the horizon should not make your complacent. As an investor, you have to be concerned about the risk you are taking as you invest in a Hong Kong property.
Risks to investing in a property in Hong Kong
So what are the different risks when investing in a Hong Kong property?
This simply means you owe more than the actual value of the property. According to a news article published in Hong Kong Business, the housing market conditions are forcing banks to loosen mortgage restrictions by offering up to 90% LTV (loan to value ratio).
Since experts are saying that the Hong Kong market has yet to reach the bottom of the property cycle, it is almost a guarantee that those who will get a 90% LTV mortgage will end up with a negative equity.
When this happens, you will be technically at a loss on your investment. Of course, you should not be too quick to sell the property when this happens. You need to wait it out until the property cycle recovers before you decide if you will sell or not.
Low rental yields.
Another risk when investing in a Hong Kong property is when the yields from the rental income are compromising the ROI (return on investment). According to the Global Property Guide, the gross rental yield in the housing market of Hong Kong is only 2%. This means the profit is quite low.
While this is something that you should be concerned with, there is one truth that you need to remember. The high housing prices in Hong Kong will ensure that there will be enough demand for rental properties. In this regard, your investment is safe. It is low, but the income will be continuous.
Of course, you have to remember that the low rent in Hong Kong is still relatively high compared to other cities. If you keep your unit well maintained and buy a property in a good location, you should be okay.
The rise in interest rates.
Yet another risk that you need to consider is the interest rate that will affect your mortgage payments. Since property prices in Hong Kong are expensive, you are most certainly going to borrow money to pay for it. A high-interest rate will compromise the already low rental yield of your unit. The key to keep this from becoming a risk is to maintain a good credit score so you can refinance to a lower mortgage rate.
Obviously, if there is nobody living in your rental property, you will not earn anything. This is why the vacancy rate is one of your biggest enemies in property investment. But like we said, this risk is not really much of a problem in a densely populated city like Hong Kong.
According to an article from the South China Morning Post, the rent usually drops when the supply of housing increases. This is not a problem in the housing market in the city because there is actually a low supply of units. Tenants have fewer options so the vacancy rate will surely be low in this city.
Your tenant is also one of the risks when investing in a Hong Kong property. They can break your unit if you do not select them properly. Of course, proper insurance and a security deposit from the tenant can help cover the cost. However, something more serious like a fire can totally destroy your rental property. So choose the tenant very carefully and make sure to check character references.
Another risk that can compromise the value of your rental property is a natural disaster. According to the data from BEC.org, Asia is one of the most disaster-prone regions.
Although Hong Kong is not as bad as the other areas in Asia, we can still be hit by a bad typhoon now and then. With the climate change problem, you need to keep tabs on how this can affect the region. If you have yet to invest in a property, make sure you buy from a location that can survive climate problems.
Finally, the last risk that you will take as a property investor is the structure of the property. Since most real estate units in Hong Kong are in buildings, you need to check the whole building before you invest. The unit may look new and modern but if the building is old, that could be a problem. You should also check into shared areas like hallways, lifts, etc. These will affect the appeal of your rental unit.
How to minimize the risk of property investment
Here are some tips that will help you minimize the risks when investing in a Hong Kong property.
- Get an insurance. While this is not mandatory, a real estate owner is encouraged by the mortgage lender to take out an insurance (e.g. fire, third-party risk, etc).
- Keep your credit rating high to make it easy to get a low-interest refinancing.
- Hire a good property manager to keep your vacancy rate down.
- Screen tenants and make sure the contract they will sign will clearly state that they are responsible for the upkeep of the property’s interior.
- Do not delay maintenance or repairs. This will keep structural problems from becoming worse. It is better to treat it while the problem is small.
- Have an emergency or operating fund for the rental unit. This will allow you to spend on emergency expenses of the property.
- Pay your taxes – to keep it from compromising your rental income.
While the risks when investing in a Hong Kong property may be plenty, that does not mean you cannot prepare for it.Recommend0 recommendationsPublished in