Should I put my money into Hong Kong property or stocks?

March 24, 2015 / By  

When speaking with my friends about investing, a question inevitably comes up – should I put my money into Hong Kong property or stocks?

On the face of it, Hong Kong stocks seem to be the answer, at least for this year. 2015 is looking like a good year for the stock market, as the loose monetary environment and China reform expectations are likely to boost up equity valuations. Most securities houses anticipate the Hang Seng Index (HSI) to end the year at the 25,000 to 27,000-level – 5-13% higher than the start of the year. On the other hand, we expect mass residential property prices to only rise by 0-5% under the government’s new restrictive measures.

Before placing your bets, however, you need to realise that the stock market is much more volatile than the property market, which means a higher downside risk exists for stocks. Looking beyond 2015, property prices will likely be affected by the interest rate hike, but so will stocks. Higher volatility implies that the correction in the stock market is likely to outstrip that of the property market.

So, do the higher returns sufficiently compensate for the higher risks involved? Let’s take a step back and look at the historical risk adjusted returns of both markets. The most common approach is the Sharpe Ratio—the average return earned in excess of the risk free rate per unit of volatility. When we look at returns, it is not only about capital appreciation. You can also earn rental income from holding properties and dividends for stocks. Combining rental income or dividends with capital appreciation gives you total returns. As it turns out, the Sharpe Ratios calculated for the total return indices of both investment options in the past 20 years show that the risk-adjusted return for mass residential properties is higher than that of the HSI. If we believe in history being a reliable predictor of the future, investing in property would be a better choice.

Annual Total Returns
Source: Rating and Valuation Department, Hang Seng Indexes, Yahoo! Finance, JLL Research

Of course, this is just a simplified version of the real world. There are some practical issues when you invest in property. The first one is liquidity. The stock market is a highly liquid market where you can easily sell your stocks within seconds. The property market can very much be the opposite. In some instances, it may take months to dispose of your property. The second one is upfront capital requirement. Today, an ordinary unit can easily set you back at least HKD 5 million while one lot of the HSI Tracker Fund (stock code: 2800) would cost you less than HKD 15,000. The third one is the stamp duty requirements for property, which has had a dampening effect on short-term return expectation.

But still, if you have enough capital and are open to longer holding periods, investing in bricks and mortar in Hong Kong should be the better investment proposition.

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