Hong Kongers have made property investment a favorite pastime. No conversation about finances avoids the topic in a city that by some counts has both the most expensive residential property and the costliest office property.
So Nicole Wong, the Hong Kong and China property analyst at CLSA, has grown weary of answering the question as to whether now is the time for someone to buy property in Hong Kong.
Right now, she advocates buying property stocks rather than physical property, she said in a briefing at CLSA's Investors' Forum, taking place this week in Hong Kong. The market is "boring," she says, with price declines likely to resume, but driven by exciting companies. In yesterday's story, "How to Play Stocks in China's Superheated Property Market," I looked at some trading ideas for mainland Chinese stocks; today I'll run through Hong Kong's leading developers.
Hong Kong developers have traded at a steep discount to their net asset vale for three reasons, Wong believes. They have previously recouped a very high portion of their earnings from property development, have traditionally had a low dividend payout ratio, and have for years resisted selling off properties.
That situation has changed. Looking back, Sun Hung Kai Properties ( (SUHJY) ) got 72% of its 1997 earnings from property sales, and only 28% from property rentals. That has flipped now, with the company receiving 58% of income from rents.
That is helping them pay out what are now healthy dividends. New World Development ( (NDVLY) ) has a yield of 4.3% this year, and Hang Lung Properties ( (HLPPY) ) 4.2%. Kerry Properties ( (KRYPY) ) (3.8%), Sino Land (3.7%), Hysan Development (3.7%) ( (HYSNY) ), Wharf (3.4%) ( (WARFY) ), Sun Hung Kai Properties (3.3%), Henderson Land (3.2%) and Swire Properties (3.1%) ( (SWROY) ) all provide yield-hungry investors with a healthy regular payout. They have been loath to cut dividends, too -- Sun Hung Kai has done that only once in 23 years.
Only Hongkong Land (2.8%) ( (HNGKY) ), the biggest landlord in Hong Kong's main business district, Central, pays less than 3%. Physical real estate in Hong Kong also produces a yield of around 3%, but once you've deducted tax on rents, management fees and other recurring costs, CLSA figures yields are "zero point something" in terms of what finally makes its way into your account.
All of those companies trade at a discount to net asset value -- typically one-third less than the value of their holdings. But they are in stronger financial shape than that investor view merits, Wong believes. Bar Singapore-listed Hongkong Land, all the stocks trade in Hong Kong, if liquidity on their ADRs is poor.
CLSA's only buy recommendation in the sector is on Hang Lung, which is one of the company's 10 favorite stocks operating in China, where it is building a series of upscale malls. But it has outperform ratings on Sino Land, Hongkong Land, Hysan, Swire Properties and the Link REIT HK:0823. Link REIT is a real-estate investment trust set up by the government to buy and operate shopping malls and parking lots, mostly in public housing estates. Its dividend yields 3.7%.
CLSA has sell calls on Wharf, Great Eagle and Kerry Properties, which don't have as strong a brand as high-end property developers such as Sino Land and Swire. It believes Henderson Land, Cheung Kong and New World Development, which generally rely on the mass market, will underperform.
Henderson Land boosted its dividend by 32% in fiscal 2015 and again by 11% in the first half of this year, despite lower earnings. Sun Hung Kai raised its payout to investors by 15% this fiscal year, even though the Hong Kong residential property market was very slow at the time.
The market has since picked up pace, thanks to pent-up demand and greater confidence that China's economy is on surer ground. But with the number of apartments under construction in Hong Kong having doubled, CLSA feels confident developers will sacrifice high prices to generate demand. It anticipates a decline of 7% in residential prices next year, although Wong admits that depends on the "psychology of the crowd" in a momentum-driven market.
Another reason the real-estate stocks are attractive is that Hong Kong developers have been buying up their own shares. Hysan acquired 1.1% of its own outstanding shares in the first half of the year. Great Eagle's chairman, Lo Ka-shui, has been reinvesting the dividend that his company has been paying him in the company's stock. If it chose to do so, Sino Land has the cash on hand to buy back one-quarter of the entire company.
There has been speculation that Henderson Land might be taken private, since its majority owner, Lee Shau-kee, has raised his ownership stake of the company from 62% to 74%. "They are just a button away," Wong says. "Will they do it? They said no. But can they do it? Anytime. The family is so rich." Lee is worth $24.9 billion, according to Forbes, second only to Li Ka-shing in Hong Kong and ranking him No. 31 in the world's rich list.
Henderson Land and Cheung Kong Property have been selling buildings, too, in a break with tradition. Henderson received HK$4.4 billion ($570 million) this month with its sale of the Golden Centre shopping mall in Hong Kong, while Cheung Kong has a major Hong Kong office tower, The Center, on the market for HK$35 billion ($4.5 billion). That price tag would make it Hong Kong's largest-ever sale, with a state-owned Chinese enterprise the likely winner.
Li Ka-shing, Cheung Kong's founder, has come under fire for selling assets in China, too, raising 20 billion yuan ($3 billion) and often redirecting the money to investments in Europe. But he's a trader by heart and clearly sees bargains in Britain in particular.
Hong Kong's dollar is pegged to its U.S. counterpart, meaning the currency has shared the greenback's gains. That only makes it even more attractive for companies generating profits in Hong Kong to target international holdings. "We will see more sales for sure," Wong says. "For the same price, they can grab pretty good assets overseas."
In a sign that Cheung Kong has certainly not written off the Hong Kong market, the company last week spent HK$1.95 billion ($250 million) to acquire a residential site in Kau To Shan, near the suburban neighborhood of Sha Tin. That was 33% above the high end of forecasts, and the first land auction Cheung Kong had won in four years.
Many of the other major developers have already cut prices to generate brisk sales, and now need to boost their land banks as well. Sun Hung Kai, Sino Land, Hysan and Hang Lung have all reduced their gearing dramatically in the last decade, so they have the cash to re-enter the market.
But they face heavy competition from mainland Chinese developers, who have become very active in the Hong Kong market in the last two years. Wong points out that, since Hong Kong property is 10 times as expensive as Chinese real estate, the developers like the opportunity to generate 10 times the profits they might on a mainland development, without any need for extra headcount at the company.
Real estate in China's Tier 2 cities -- mostly provincial capitals -- sells for around 10,000 yuan ($1,500) per square meter, compared with 100,000 yuan ($15,000) in Hong Kong. Hong Kong's tax is also much lower than China's, so the developers receive the bulk of the city's 25% gross profit margin for property sales.