2017年4月29日星期六
 
專家論市
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"Investing in property can positively contribute to portfolio diversification and enhancement of returns."

Hong Kong property - the cheapest in the world?
12/05/2014


Investing in property can positively contribute to portfolio diversification and enhancement of returns.

That is because it often performs differently or with limited correlation to other traditional holdings such as equities and bonds. Moreover, property protects investors from inflationary risks.

But at the same time, the sector can be a minefield.

Not only do different geographical regions significantly vary in performance, but there may be substantial divergences in returns achieved depending on what investment vehicle is chosen to access the property market.

So a thorough analysis should be done before investing in real estate.

For example, Hong Kong has the priciest property market in the world on a price-per-square-foot basis.

The Demographia International Housing Affordability Survey conducted earlier this year by US consultancy firm Belleville showed the Hong Kong home market was the world's least affordable.

Median home prices locally rose to 14.9 times gross annual median household income, the highest in the 10 years the survey has been conducted.

However, what appears to be less known is stocks of property firms listed in Hong Kong, on average, actually happen to trade at the world's largest discount compared with their book values.

This implies an attractive arbitrage opportunity between the relatively cheaper listed property securities and the more expensive physical properties.

This unusually large divergence may be the result of the generally weak Hong Kong and mainland stock markets that have dampened investor interest in equities, including property stocks despite relatively high home and commercial real-estate prices.

Some locally listed real estate investment trusts, which simply own and rent out physical properties similar to what direct property owners do, even trade at steep discounts of more than 50 percent relative to the current market value of the real estate they own.

Surely, it can be argued that the undervaluation is due to the market anticipating a sharp drop in local property prices. But the reality is that physical properties !V for the most part !V are still being bought and sold at market prices.

The majority of Hong Kong-based investors tend to own properties here, or at least think about buying at some point in the future.

Therefore, would it not be reasonable to consider gaining exposure at ``half the market price'' through a listed vehicle instead of buying a unit for self-use.

As with any investment, however, listed property securities and REITs do of course have their drawbacks and risks.

These include potentially higher volatility than the general equity market, potential conflicts of interest issues between developers and management firms along with the risk of fraud. But there is hardly another way for individual investors to gain access to heavily discounted quality commercial properties at yields considerably higher than those achieved in the physical residential market.

And, generally speaking, Hong Kong and indeed the majority of Asian REITs tend to be well managed by experienced sponsors.

Most of the REITS have strong balance sheets, often benefiting from cheaper debt costs, nearly 100 percent occupancies and no foreseeable departures in the future of any large-scale tenants.

Taking all factors into account, locally listed property firms do seem to be the most outstanding bargains of the global property market.

Ironically, they exist amid the world's most expensive property market in the form of stocks and REITs. Such securities provide outstanding value and opportunity for strong risk-adjusted returns over the coming years based on their large discounts to book value.

Yet they are going unnoticed by most amid the hunt for flats in the highly priced physical market.
 


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