Hong Kong’s newest investment bubble: taxis

As the stock market and property prices begin to drop, investors in Hong Kong are looking to taxi licences as the newest way to make money.

A photo taken on Nov. 19, 2011, shows a taxi driving through the central district of Hong Kong. With more than 18,000 taxis plying their trade to a population of over seven million, the night shift is a busy one.

By: Emma Bi Sheridan Prasso Bloomberg

HONG KONG—Jewelry store owner Allan Shek says he’s made millions by riding wild swings in the stock market and buying into the city’s property boom. But no more.

Recently, he bought five Hong Kong taxis and the licenses to operate them.

“If I have the ability, I will buy another 15 taxis this year,” says the 60-year-old Shek, adding six or seven of his friends have also bought taxis.Cleaver in China

Shek speaks with rapid-fire enthusiasm over the latest way to make money in a city where the benchmark Hang Seng Index has fallen almost 7 per cent from the year’s high and record property prices have started to decline because of government curbs.

The price of a license combined with a taxi reached a record of just over $1 million on June 6, the highest since Taxixchange.com, which brokers deals, started tracking the data in 2000.

Prices have surged more than 80 per cent since taking off in September 2009, as cheap financing and expectations of continued gains draw investors.

“Investors feel there aren’t many good investment tools in the market, as there are restrictions on the property market, and the stock market is not performing that well.”

The run-up is sparking warnings of yet another investment bubble in a city that’s no stranger to them, says Billy Mak, associate professor of finance at Hong Kong Baptist University. The prices for the cars — most are shiny, red Toyota Crown Comfort models imported from Japan — and their licenses have increased at a faster rate than the income the taxis generate.

“The bubble is already there,” says Mak. “Investors feel there aren’t many good investment tools in the market, as there are restrictions on the property market, and the stock market is not performing that well.”

Investors typically turn over their purchases to taxi-management companies, which rent them to drivers to generate income. About half the licenses are bought by investors, according to Sintat Motors Management, another broker.

While prices of the taxis and licenses have almost doubled since 2009, daily rental costs of about $90 to $105 have increased roughly 12 per cent in the same period, says Ling Chi-yung, general manager of Sintat Motors.

Many of the investors are shifting out of the property market, according to Cheung King-sum, Sintat’s executive director. About 10 per cent are retirees looking for stable income, he said, while 10 per cent of owners are drivers.

Home prices in the former British colony have more than doubled since the start of 2009 because of near-record low mortgage rates and an influx of Chinese buyers. That turned the city into the world’s most expensive place to buy an apartment, according to London-based property broker Savills.

Seeking to slow the housing bubble, Hong Kong Chief Executive Leung Chun-ying introduced a series of curbs, which led investors to drive up the costs of parking spaces and resulted in more measures. The latest, in February, led to a 2.7 per cent drop in home prices since their peak. Transactions in the first half of this year fell to the lowest since 1996.

“Today the return rate of a taxi is higher than that of property,” says Kenny Wong, 42, an investor who owns four vehicles after purchasing his latest last year

Taxis generate about $2,400 a month after management, maintenance and insurance is deducted, Cheung says.

Putting $1 million, the record cost of a taxi in June, in a bank would pay just $170 per month in interest, at a rate of 0.20 per cent for a one-year time deposit at HSBC Holdings, with no chance of capital appreciation. The same amount would have purchased a 55-square-metre apartment on Hong Kong Island, according to data compiled by Midland Holdings Ltd.

In New York City, prices for taxi medallions — the aluminum disks affixed to the hood of cabs allowing them to operate — prompted a spurt of investor interest after two of them sold for a record $1 million (U.S.) each in October 2011. The latest New York medallions, not including the cost of the cab, sold for $1.05 million in July.

Hong Kong’s taxi prices are fanned by a limited supply held constant since 1994, the last time the Transport Department issued licenses. With 15,250 red, or “urban,” taxis on Hong Kong’s streets, the department will only “consider issuing new taxi licenses as and when necessary to ensure there is adequate taxi service to meet public demand,” according to spokesperson Michael Kwan.

And the government crackdown on real estate has made it harder and more expensive for investors to get financing to buy property, compared with taxis, says Cheung of Sintat Motors.

“The low cost of borrowing helped investors a lot,” says Chan Man-keung, the founder of Taxixchange, who started as a taxi driver in 1976 and bought his first cab three years later before going on to broker their sales. “The recent years are the best time for taxi-license trading in the past 30 years.”

Wong, the investor, says his interest rates are slightly below 2 per cent — about $1,740 a month for each taxi, leaving him with $670 a month profit.

“Every industry in Hong Kong may go up or down,” adds Shek, the jewelry-store owner, “so it’s important to take the opportunity of the time and policy.”