Question

Peter is a Hong Kong permanent citizen. He currently has 10 million dollars in his bank account, in which he can earn a 0.5% deposit interest. Given the inflation rate is 2%, he thinks that he is losing his purchasing power. He is considering investing in: A) Hong Kong residential property or B) US Treasury bonds.

Please advise Peter about the advantages and disadvantages of these two alternatives.

Answer 1

Advantages and disadvantages of investing in Hong Kong residential property :

1. Buying real estate property is still considered to be unaffordable for many people owing to the expensive rates. However in this question, Peter has 10 million dollars in his bank account and hence can easily afford such an investment.

2. Investing in Hong Kong Real estate is considered to be low risk investment as the property prices are expected to rise in the future.

3. The yields/returns from renting such a property in future is generally low, approximately around 2%. Although the income will be low, but it is expected to stay constant over the years.

4. High Vacancy rate of rental properties will affect the income of the property owner, however this is unlikely to happen in Hong Kong since there is a low supply of housing units and hence, vacancy rates are generally low.

5. Damage of property caused by natural disasters, damage by tenants are some of the risks of invetsing in real estate property.

Advantages and disadvantages of investing in US Treasury Bonds :

1. High credit quality of the security among all securities in the US market

2. tax advantages in some cases, where the state and local taxes are exempt on bonds

3. highly liquid market due to huge quantities of bonds bought and sold

4. a good investment till retirement as treasury securities are safer investments than stocks.

5. the returns are safe but on the lower side, these are low yielding securities

6. Treasuries are not immune to interest rate risks, which means that rising interest rates will lead to falling bond prices

7. Inflation risk; higher inflation will lead to a decline in investment value