The fast-growing Hong Kong property market has ballooned in the past few years. Over the six months ended February 2018, Hong Kong home prices rose 6.9%. Colliers International estimates that mass residential property prices are likely to increase by 8% to 10% this year, with smaller units increasing at a faster pace of 15%. This is a tremendous rate of growth for any investment.
Over the longer term, Hong Kong home prices have been surging for 23 consecutive months, marking the longest sustained growth trend in 25 years. With demand sky-high and interest rates low, analysts continue to be bullish about the property market in Hong Kong.
With this in mind, here are two Singapore-listed stocks with low valuations that can give investors exposure to the Hong Kong property market.
The first company is Hongkong Land Holdings Limited (SGX:H78), a property investment, management, and development group. It has a main listing in the London Stock Exchange with secondary listings in Bermuda Stock Exchange, and the Singapore Stock Exchange. With a history of around 130 years, Hongkong Land is one of the oldest property companies listed in Singapore.
The company has two business segments, namely investment properties and development properties. The investment properties segment, which refer to properties that the Hongkong Land owns as long-term investments, contributed 67.7% of the company’s US$1.46 billion in operating profit in 2017. Of the US$988 million in operating profit that came from the company’s investment properties segment, its properties in Hong Kong accounted for 85.3%. As of 31 December 2017, Hongkong Land had an investment portfolio in Hong Kong that was valued at US$30.9 billion.
Hongkong Land’s Hong Kong assets comprise 12 commercial buildings and include some of the most valuable real estate in the heart of the city, a region known as Central. The properties are considered to be grade “A” commercial properties. The limited land supply in the Hong Kong city center has led to consistent growth in rental rates for the company’s portfolio. The average rental rate of Hongkong Land’s Central portfolio has grown at an impressive annual rate of 5.5% from US$8.52 in 2008 to US$13.82 in 2017.
Moreover, Hongkong land trades at a discount to its book value. At the time of writing, shares of Hongkong land are exchanging hands at US$7.26 apiece. This translates to just 0.46 times book value and a trailing dividend yield of 2.75%.
The second company on my list is Fortune Real Estate Investment Trust (SGX: F25U), a REIT which invests primarily in shopping malls in Hong Kong. It has a main listing in Hong Kong, with a secondary listing in the Singapore market.
AS of 31 March 2018, the REIT had a portfolio of 16 retail malls and properties in Hong Kong. Some of the prominent malls in its portfolio included Fortune Metropolis in Kowloon and Caribbean Square on Lantau Island.
The REIT has one of the best track records of growth among Singapore-listed REITs with its distribution per unit (DPU) more than doubling between 2010 and 2017. In addition, it has maintained a relatively low debt level with a gearing ratio of just 27.4% at the end of 2018’s first quarter – the REIT’s gearing is in fact, one of the lowest among Singapore-listed REITs. The low gearing also gives Fortune REIT an additional HK$12.7 billion in debt headroom to fund further acquisitions.
Fortune REIT’s properties also have a track record of appreciating in value. In 2017, its portfolio’s valuation increased by 6.7% to HK$38.8 billion. Likewise, its net asset value per unit climbed by 8.9%. The REIT has managed to capitalise on the rising property market in Hong Kong to grow its investment portfolio consistently since its listing.
Like Hongkong Land, Fortune REIT also trades at a steep discount to its book value. At its current unit price of HK$9.42, Fortune REIT has a price-to-book ratio of just 0.67, and a trailing dividend yield of 5.39%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Hongkong Land Holdings. Motley Fool Singapore contributor Jeremy does not own shares in any companies mentioned.