HONG KONG – As global investors look for ways to profit from China’s reopening from pandemic controls, the beaten-down shares of Hong Kong’s property firms and real estate funds have become popular vehicles for riding an expected economic recovery.
While China’s dropping of its stringent zero-COVID policy late in 2022 has lifted travel and tourism stocks across Asia, investors say Hong Kong’s property sector has special appeal as the mainland and local economies improve, tourists return to the city and, sometime this year, U.S. interest rates peak.
Investors see value in property companies regardless of whether their assets are in mainland China or Hong Kong, which reopened at about the same time.
“We certainly view the current improving backdrop of Hong Kong’s reopening as a catalyst for continued re-rating,” said Jadgeep Ghuman, managing director on public real assets team at real estate investment manager Nuveen.
Some property stocks have risen this year. Guangdong Investment is up more than 10 percent since the end of 2022, while Henderson Land Development has gained 7.2 percent. The Hang Seng Property index is up about 3.1 percent.
Fund managers are particularly keen on Hong Kong real estate investment trusts (REITs), because their stock prices are now cheaper than the value of the properties they own or partly own. REITs also tend to be heavy borrowers, so they are set to benefit when interest rates fall.
Hong Kong home prices sank 15.6 percent in 2022, ending a 13-year rising trend after three years of COVID-19 dried up flows of property buyers from China and tourists.
Rises in Hong Kong mortgage rates that began last year have compounded troubles for developers and mortgagees. Hong Kong interest rates tailgate those of the U.S. due to the local currency’s peg to the dollar.
Reopened borders
Fund managers said the property sector had become a bargain since borders reopened in January and as the widely expected end of Federal Reserve’s monetary tightening approached.
“Hong Kong has a lot more to get us excited than China property companies where their financial data remains weak,” said Tim Gibson, co-head of Global Property Equities at Janus Henderson Investors.
Gibson likes Link REIT due to its heavy exposure to shopping centres that focus on non-discretionary retail spending.
Link REIT’s share price dropped 54 percent from a peak in July 2019 to a trough of HK$46.3 at the end of October 2022. On Friday, it was still down 37 percent from the peak.
Rating agency Moody’s Investors Service said in a report last week that a rebound in tourism and retail consumption would raise the aggregate retail rental income of the property companies it rated, which include Link REIT and Sun Hung Kai Properties, by up to 10 percent this year.
Fortune REIT and Guangdong Investment were also trading at attractive valuations and dividend yields, said Daniel Fitzgerald, portfolio manager at Martin Currie, a specialist investment manager at Franklin Templeton.
Fortune REIT is trading at 54 percent discount to its net asset value. Guangdong Investment offers a dividend yield of more than 6.9 percent, higher than the industry median of 4 percent.
“We remain positive on Hong Kong and many of its listed real asset companies, across infrastructure, utilities and property,” said Fitzgerald. “We see no reason why they could not get back to where they traded, given the re-opening of the economy.”