HKMA’s first year in real estate sees valuation dip

In its first full year of owning investment properties, the Hong Kong Monetary Authority’s $320 billion Exchange Fund saw its value dip as it revealed its overall annual return had dropped by more than two-thirds also.

The Hong Kong Monetary Authority (HKMA) saw the real estate investments of its $320.6 billion Exchange Fund dip in value by HK$295 million (€28.7 million; $38 million) in the year to 31 December, it revealed today as it published its annual report.

The Authority, which launched in April 1993 to ensure the stability of Hong Kong’s currency and banking system, said in the report the property investments of the Exchange Fund were valued at year-end at HK$3.126 billion, down from HK$3.421 billion thanks to the findings of third-party valuations and exchange rate differences. The report also stated the properties, which are held freehold and outside of Hong Kong itself, had generated a net rental income of HK$133 million.

HKMA entered the real estate space in 2010 in something of a departure for its Exchange Fund which had not previously been invested into alternatives. In the same year, the fund also increased its exposure to other alternative assets such as private equity.

HKMA did not analyse specifically what happened to its investment properties. However chief executive Norman Chan said it had taken measures to cool the property market in Hong Kong from last June with a view to ensuring Hong Kong’s banks could withstand any significant pricing correction.

Chan said: “As a result of successive actions taken by the HKMA, turnover in the property market dropped significantly while prices eased by 3.9 percent in the second half of the year.” During that time, Chan said the average loan to value ratio for new residential mortgages decreased to 53 percent in December 2011 from 64 percent in September 2009 before its first round of measures were implemented.

Chan said: “In response to the rapid expansion of credit in other areas, HKMA repeatedly reminded banks that their credit underwriting standards must not be diluted by strong loan demand from customers, their loan growth must be supported by stable funding sources, and they must have strong buffers against possible deterioration in asset quality.”

In its report, HKMA reported an overall income of HK$27.1 billion in 2011, reflecting a mere 1.1 percent return, less than a third of its return in 2010. Chan said the fund had not escaped the “unpredictable volatility” prevalent in the year in Europe and the US. “No region escaped this unsettling uncertainty,” he said.

Chan pointed to downgraded US foreign currency, Europe’s debt crisis spreading from its peripheral economies to its major economies, the earthquake in Japan as well as inflation and asset bubbles in China as responsible for the “imbalances in the global financial system”.