Hong Kong's Go-Go Real Estate Days Are Gone

HONG KONG -- With real estate prices and rents down about 50% from their 1997 highs, and with economic growth rebounding, a new investor to Hong Kong might think this would be the time to buy some of city's depressed-looking real estate stocks. After all, real estate used to be the city's premiere sector before telecom and Internet companies captured investors' hearts.

But this has not been the case, in large part because of Hong Kong's fixed exchange rate. The Hong Kong dollar is one of the few currencies in the world still linked to the U.S. dollar. As a result, the island's interest rates move in lock step with those of U.S., which wouldn't be such a problem if the Hong Kong economy and the American economy weren't in such very different places now.

Though Hong Kong's GDP growth is up and its stock market has boomed, it is still mired in deflation. Consumer prices have tumbled steadily since January of last year and are still falling at an annual rate of 5%. Yet this has been happening as interest rates march inexorably higher. Last Friday, Hong Kong's banks jacked up the prime lending rate by a quarter of a percentage point, to 9%. With deflation of 5%, that makes for 14% real interest rates. Ugly.

At such levels, "I can't see property going anywhere," says Adam Osborn, a real estate analyst at Dresdner Kleinwort Benson. ...