Thread by @mbrookerhk

Was just musing about the 2014 annual report of Hang Lung Properties, as I do from time to time. Is there a better long-term bearish bet in the world than Hong Kong real estate? 1/

The city is being torn apart by violent protests. It is the least affordable property market in the world, and has been for years. And the Centa-City Leading Index has only just begun to turn down, dropping 2.6% from its June peak.

It seems obvious that sooner or later, probably sooner, the government will embark on a huge program of public home-building to placate its restive population. The alternative is to bring in full democracy, which 1) China won't allow, and 2) Might have the same result anyway 3/

Hong Kong property prices have risen 5-6 times since their low in 2003. A lot of this was driven by the post-GFC surge of dollar liquidity from the US, but also by the drying up of supply - a deliberate HK govt policy that was a response to the 1997-98 Asia crisis 4/

Which brings us to Ronnie Chan, the chairman of Hang Lung, who in the company's 2014 annual report delivered one of the most candid-ever assessments of how Hong Kong's property cartel made out like bandits for years thanks to the government's ineptitude. 5/

Announcing record profits, Chan noted that the margin on its The HarbourSide project in Kowloon was 78%. "It is unlikely that I will in my career witness a more lucrative project," he wrote, and explained how this came to pass.

"After the Asian Financial Crisis struck on July 2, 1997, property prices began to plummet in early 1998. A land sales moratorium was imposed by the HKSAR government. Once it was lifted in the spring of 1999... we [were sitting] on a lot of cash." 7/

"When we first sold The HarbourSide apartments in 2004, the market was just recovering. The effects of the Asian Financial Crisis lingered until 2002, which was followed by SARS in 2003. Being financially strong, we saw little reason to hurry the sales program." 8/

"Then a most amazing thing happened."

By 2004/2005, the effects of the Asian Financial Crisis and SARS had subsided. However, the government was determined not to release land for sale..." 8/

"I could understand why it did so in the years between 1998 and 2004, but to continue for another 6-7 years was inexplicable."

(That last one should have been 9/ - numbering not my strong point. It's worth quoting this letter at length because it says so much.) 10/

"We responded to this externality, which was totally out of our control, by withholding completed apartments from the market. We simply waited for the inevitable higher prices..."

11/

And there we have it. A billionaire property developer saw the government making a catastrophic mistake, and did what any self-respecting capitalist would do - maximised profit for shareholders. That's what a public company is supposed to do, after all.

12/

But what of the future? Chan had some thoughts on that:

"We also foresaw that the present government will sooner or later massively sell land to catch up, as higher residential prices have already become a huge social problem."

13/

Almost five years on, how prophetic does that look? An aloof and unrepresentative government has ignored and ignored the problem, while even the billionaire tycoons that were the beneficiaries of these policies were alert to the risks. Now there is no hiding.

14/

Forget ridiculous boondoggles like the Lantau artificial island. Hong Kong is going to have to take more realistic steps to increase the supply of public housing quickly. I fully expect this to be one of the main results of this year's unrest.

ends