Owning a Hong Kong residential property as retirement investment vehicle

August 14, 2012 / By

Hong Kong, like many other cities in the world, is facing the challenge of an aging population. According to the Hong Kong Population Census 2011, the median age rose from 36.7 in 2001 to 41.7 in 2011. The population aged 65+, which comprises about 13% of the total population (7.1 million people) in 2011, is projected to reach 19% of the 7.7 million population by 2021.

To better plan for life after retirement, I notice that many local middle-aged people in my social circle who have accumulated a certain level of wealth, include property investment in their retirement plans; typically purchasing an additional residential unit as a retirement investment vehicle.

Despite having one of the most volatile property markets in the world, the long term capital gains that can be achieved from investing in Hong Kong’s residential market generally attract buyer interests. On average, a typical buyer in the local residential market takes out a 20-year mortgage loan. If we look at historical market performance, residential property prices have grown by about 200% over the last 20 years, at a CAGR of 6% per annum, while yields have averaged at around 5% for mass residential properties over the same period. Although it does not imply that we will see same rate of growth over the next 20 years, there seems to be very few alternate asset classes or investment vehicles that are able to achieve such capital appreciation.

If one were to buy a property in the middle part of his or her career, the mortgage may well be entirely paid off by the time he or she retires. Given the relatively stable rental trend, the rental property investment will likely generate a steady cash flow as income streams in retirement.

Of course, property owners can always sell their properties and realise capital gains at any time. However, in view of the current low interest rate and positive carry environment, I believe investors who have already seen capital appreciation in the latest upcycle will continue to hold onto residential properties as an investment vehicle. Coupled with the Special Stamp Duty policy which locks in buyers for two years, the market will effectively see lower supply available for trade in the secondary market, and thereby reducing market liquidity in the private residential market indirectly.

Any incentives for stable rental investments will likely start fading out once interest rates go up noticeably in the future, but I believe investors will still be able to enjoy this great investment, at least, for another two years.


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