Low rise

Hong Kong Property's Curious Disconnect

Why builders are missing out in the housing boom.
Billy H.C. Kwok/Bloomberg

Hong Kong's towering home prices might rise another 10 percent this year. All the more reason to shun developers and buy retail or even office landlords.

That might not make sense at first glance, but the real estate boom hasn't benefited developers in the city much in the last seven years. There's been a disconnect, as JPMorgan Chase & Co. analyst Cusson Leung notes, between the city's residential prices -- up 200 percent since 2009 -- and stocks like Li Ka-shing's CK Asset Holdings Ltd. and Henderson Land Development Co. 

Uncoupled

Hong Kong developers' share prices have not kept pace with the property boom

Source: Bloomberg, Centaline Property Centa-City Leading Index

Note: Data for Hong Kong's nine biggest property developers.

JPMorgan's Leung says that among reasons for this are investor skepticism that current home prices are sustainable, and the developers themselves. These companies are failing to monetize their assets; face a lot of competition; and crucially, are stingy about sharing their huge cash chests as dividends and buybacks.

There's very little chance prices in Hong Kong will crash, barring an external shock on the order of the 1997-98 Asian crisis or the 2008 global financial crunch, both of which provoked collapses.

Sudden Shock

Hong Kong's property prices tend to fall when external events hurt the economy

Source: Centaline Property Centa-City Leading Index

With savings rates at banks so low, and developers happy to top up mortgage borrowing, real estate is still seen in Hong Kong as the safest store of wealth. And as I've said before, it's going to take a lot more than four Fed rate hikes this year to kill the market -- even a full percentage-point increase is peanuts.

That's assuming banks, flush with deposits, pass on those rate hikes, which Hong Kong mirrors to keep its currency's peg to the U.S. dollar intact. On average, lenders' loan-to-deposit ratio is 65 percent, compared with 79 percent at U.S. financial institutions. The prime lending rate, currently 5 percent, was last raised in March 2006 and has been falling from a peak of 8 percent in October 2006. 

Even if banks did raise prime rates, Hong Kong property gains are likely to slow rather than reverse. JLL, a real estate consultancy, forecasts residential capital values rising 10 percent this year, down from a 15 percent pace in 2017, as more supply comes on the market. JPMorgan's Leung sees prices increasing 10-15 percent this year.

While homebuilders lack investor love, there are property companies that are seeing gains. Shoppers from China, after years shunning Hong Kong for the brighter lights of Tokyo and Seoul, are returning, and retail is picking up in a city where e-commerce hasn't taken off as it has in the mainland. That's good for mall operators like Hysan Development Co., which owns the Lee Gardens complexes in Causeway Bay. 

Office rents may also keep rising, as mainland firms continue to set up shop in Central, the main business district where Hongkong Land Holdings Ltd., a unit of Jardine Matheson Holdings Ltd., remains the biggest landlord. Newly created business districts like Quarry Bay at the eastern end of Hong Kong Island benefit the likes of Swire Properties Ltd.  

That's not to say residential developers are questionable investments. They've come back on top compared with mainland Chinese builders, whose briefly dominant role in land purchases faded because of Beijing's capital controls. In addition, Sun Hung Kai Properties Ltd. and Henderson Land are in talks with the government to convert idle farmland to residential use.

The fact remains, though, that homebuilders aren't fully benefiting from the boom. And at some point, real estate will take a hit. While the developers have narrowed the gap in recent months, investors seem happier buying bricks and mortar than proxies.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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