Did The Hong Kong Property Market Just Burst? 2 Stocks That May Be Affected

Hong Kong property prices have been surging over the past few years. A report from Swiss bank UBS indicated that Hong Kong property prices have appreciated around 340% from 2003 to 2015.

But, 2016 might not be such a good year for Hong Kong real estate.

Based on January 2016 data, monthly home sales in the city had reached its lowest levels since such data was first tracked in 1991. More alarming is that a recent government-released land parcel in Hong Kong’s New Territories area was sold at a price (on a per square foot basis) nearly 70% lower than a similar transaction that took place in September 2015.

Piling on the pressure is the government of Hong Kong – it is planning to increase the amount of housing supply to the market over the next five years due to high property prices which has made housing unaffordable for the city’s residents.

Will these developments be the trigger to mark the start of a prolonged slump in Hong Kong’s property market? Will any potential troubles that may arise in the residential real estate market hit other real estate sectors such as commercial and retail?

In Singapore’s stock market, there are a few companies and trusts that are exposed to the Hong Kong real estate market. Two of the bigger entities in that category would be Hongkong Land Holdings Limited (SGX: H78) and Fortune Real Estate Investment Trust (SGX: F25U).

Source: S&P Global Market Intelligence

Hongkong Land is one of the largest property owners in Hong Kong’s Central district, owning many premium commercial office towers there. Meanwhile, Fortune REIT is a real estate investment trust that invests mainly in retail malls located in Hong Kong. At the moment, the REIT has 17 properties in its portfolio.

With the possibility of a slump in property prices in Hong Kong – at least for the residential real estate sector – what does the near term future hold for both Hongkong Land and Fortune REIT?

Hongkong Land might have an advantage over Fortune REIT when it comes to withstanding any downturn in real estate.

With Hongkong Land’s strong balance sheet (it has a net debt to equity ratio of only around 9%), it has flexibility and is facing lower financial risks even if its properties are revalued to a much lower level.

That said, if there’s a prolonged slump in Hong Kong, the rental rates for Hongkong Land’s properties might still take a hit in the future, hurting its earnings going forward. Before that becomes a reality, it seems that the market is already punishing the company. Hongkong Land is currently valued at just 0.48 times its tangible book value; that’s a valuation last seen back in 2011.

Fortune REIT is also facing a similar situation. But, given that a REIT tends to have much tighter restrictions on its debt level (whereas companies are given free rein), a huge drop in the value of its properties might have a big impact on the trust.

Moreover, as Fortune REIT has a weaker balance sheet as compared to Hongkong Land – the REIT has a gearing ratio (total debt over total assets) of 30.1% – a sharp drop in the value of its properties might increase the REIT’s leverage to onerous heights, thereby raising the possible need for the REIT to raise equity capital and thus cause its investors to face dilution risks.

How the Hong Kong property market will play out is still unclear. Although demand seems to be slowing, the eventual impact on property prices is yet to be seen. Moreover, the current slump is mainly in the residential sector, so it is also unclear how it might affect the commercial and the retail sector of Hong Kong’s property market.

But, it is still wise and prudent for investors here in Singapore to be aware of possible dangers ahead for some Singapore-listed companies as a result of their exposure to the real estate market in Hong Kong.