Hong Kong property ignores pessimistic forecasts

Forecasts for the Hong Kong real estate market at this time last year were frustrating, because the top of the mountain overlooked Hong Kong on one of the most polluted days.

Political uncertainty, travel bans related to the Covid-19 pandemic, and Britain’s decision to open the door to Hong Kong people holding British nationals overseas passports are expected to bring down billions of dollars in real estate valuations.

However, this is not the first time that Hong Kong’s real estate market has turned its back on the predictions full of bad luck.

According to the Land Registry, the value of real estate transactions in Hong Kong more than doubled in April despite the decline in rents. According to estimates by the real estate brokerage company Centaline, in the secondary market, housing prices are expected to reach their highest level in 23 years. The average house price is only 2% lower than the historical high.

“Hong Kong is a unique market. There is constant demand for the types of buyers whose prices are irrelevant. Supply has always been limited. None of this has changed.” said Derek Chan, research director at real estate brokerage Ricacorp Properties.

It was expected that the UK’s decision would provide a favorable path to citizenship for residents who own or qualify for the territory’s 3 million residents, and the real estate market would be affected. BNO passport.

Indeed, about 310,000 BNO passports were issued last year, twice the number of the previous year. According to a study by the British Home Office, 153,300 Hong Kongers are expected to settle in the UK this year. Some of these BNO passport holders must be active buyers in the UK.

For Hong Kong people, London seems to be relatively attractive. Last year, Hong Kong was the most expensive real estate market in the world, with an average house price of US$1.2 million, or US$1,987 per square foot, more than twice that of London. In addition, the rental yield of its premium residential properties is one of the lowest in the world, at 1.8%. In comparison, London’s average yield at the end of last year was 3.8%.

However, neither of these two factors have much to do with wealthy mainland Chinese investors seeking to store cash conveniently in China. In the past ten years, Hong Kong housing prices have risen by more than 200%. Mainland buyers focusing on past returns are returning to Hong Kong to fill the void left by the locals.

In the first two months of this year, the number of residential properties purchased by mainland Chinese buyers in Hong Kong increased by 40%. Beijing’s recent push to establish wealth management links between the mainland and Hong Kong should drive up demand. Some mainlanders may regard it as a seal of Beijing’s approval to invest in Hong Kong.

Chan said: “At the current exchange rate, house prices this year should rise by as much as 15%.” He said that it is worth noting that despite the pandemic, the border between Hong Kong and China has basically remained closed, but mainland Chinese buyers The demand is there. “When the border reopens, it should increase dramatically.”

Hong Kong developers quickly took advantage of this. Road King Infrastructure and Sun Hung Kai have sold out new properties, raising the prices of the latest batch of apartments by 11%.

However, in the stock market, Hong Kong developers have been turned away for most of the past year, making their value greatly underestimated. Their transaction price has a large discount to the net asset value, far more than 50%. They are considered to be full of political risks, and the tourism industry in the state continues to decline.

However, on closer inspection, the profits from rising rents and real estate prices in their mainland China asset portfolio have offset the adverse effects of weak retail rents and vacant hotels in Hong Kong. In this way, investors can benefit from central commercial real estate in important cities such as Shenzhen and Shanghai without having to bear the heavy debt burden of mainland developers.

Hong Kong’s developers are well-funded and have some of the strongest balance sheets in the global industry. For example, CK Asset’s net debt ratio (the ratio of total debt to total shareholder equity) is only 4.8%, which is even lower than the pre-pandemic level. In contrast, the mainland counterpart Kaisa (Kaisa) is 98%, and Evergrande (Evergrande) is 153%.

The frustrating failure of forecasts over the past year has highlighted opportunities for contrarian investors. They should pay attention to Hong Kong developers.

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