One piece of timeless wisdom from grandparents in my local community goes: “Value is in putting your money to work in ‘bricks’.” The idea is to lock your wealth in properties. Which may have been feasible back in the day, but today, buying a decent apartment here in Hong Kong is almost impossible for many. It’s simply hard to save enough for the down payment.
They would then have told you, “there's a will, there's a way”. Almost everyone wants to own a home, so the will is there. Today, we’ll show you a way to own some ‘bricks’ at least, even if it’s not an actual roof over your head. No matter what stage of your investment journey you are in, you don’t need an entire down payment to consider bricks in another form.
All of the six names in the Hong Kong real estate stocks under Morningstar’s coverage are undervalued by at least 10% with a manageable uncertainty. They are value plays with stable economic moat trends. These stock market metrics collectively point to the stability features of Hong Kong properties – vertical real estate in a densely-populated city where land is in extreme scarcity. Stability is the quality we are after to lock in our wealth.
Exhibit 1: Hong Kong Property on Sale
Source: Morningstar Direct. Data as of June 17 2021.
Michael Wu, senior equity analyst at Morningstar, sees the strong case with Hong Kong property sector. “Improving fundamentals are the key positive catalyst in the near term. Selective ones may recover faster as travel restrictions with mainland China are relaxed.” To position for Hong Kong property sector, Wu says investors can look at the commercial properties like office and shopping malls.
Inelastic Office Demand
First in the office space, the pandemic has raised concerns on permanent behavior changes and the impact on office space demand and retail consumption patterns. Wu sees the work-from-home arrangement as temporary and office demand to remain strong in Hong Kong’s case.
Comparing New York and Hong Kong, Wu says the supply side difference of these international financial centers has constituted much of his conviction for the latter.
Hong Kong, among other similar locations, is uniquely situated next to areas falling into an entirely separate jurisdiction. He takes a firm operating in New York City as an example. “It can easily for it to move part of its operation to New Jersey. But significant hurdles exist for a Hong Kong-based company attempting to move parts of its operation to Shenzhen.”
Thus, he believes the office market here enjoys relatively inelastic on the supply side as the city is still a preferred headquarter for reshoring Chinese corporates.
Narrow-moat Swire Properties (01972) remains among our latest Asia’s pick and the name to play office rental growth. The Grade A offices that Swire owns earns recurrent income and the premises outside of the CBD is an increasingly attractive option for nonfinancial firms.
Return of Mainland Tourists
For investors seeking a full retail exposure, the preferred pick is fairly-valued Wharf Real Estate Investment Co (01997), according to Wu.
While the pandemic has pushed spenders online, Hong Kong’s population density and proximity to public transport would keep offline shopping relevant. “Taking a stroll inside a mall and possibly spending in the meantime is still one of the favorite pastimes of many local families.”
Wharf REIC’s main assets, Harbor City and Time Square would be positioned to capture domestic and tourist spending. The two malls collectively account for 9% for total retail sales in the city.
Additionally, for Wharf REIC, the current valuation implies a long-term loss of the tourism trade in Hong Kong since June 2019, which marked the escalation of the Hong Kong protests. Wu says: “We believe this is an unlikely scenario and mainland visitors should return with relaxed restrictions and improved confidence.” It is expected that Wharf REIC, and to a lesser extent Link REIT, to be the main beneficiaries of relaxed border restrictions between Hong Kong and mainland China.
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