Office rentals in Hong Kong are rising driven by the pickup in the local economy and increasing inve...
Office rentals in Hong Kong are rising driven by the pickup in the local economy and increasing investment in China.
Gerald Smith, head of Asia Pacific equities at Baillie Gifford says: "There is fairly good demand for prime quality office space and supply has been fairly limited.
"The government decided to release a former British military base, the Tamar Base, onto the market, and this should put some additional supply onto the market."
However, he notes that this may signal the start of the government taking a more interventionist approach to the commercial property market, as it is worried about the risks to Hong Kong's competitiveness with the rising office prices.
Andrew Salton, portfolio manager at Old Mutual says the commercial property market will have a subdued outlook over the long term as China opens up.
"The real area of strength is commercial property, with rentals rising," he says. "However, the cheaper property in the mainland should eventually depress Hong Kong prices. It is not a good market in the long term."
Old Mutual is overweight in the sector and has holdings in Sun Hung Kai, a property company, Chung Kong Holdings, a property developer and Henderson Land, also a property developer.
These companies are the biggest in Hong Kong, in terms of market capitalisation and the best managed, says Salton.
Smith disagrees, noting that some of these larger property companies appeared overvalued and that there is more opportunities in the smaller end of the market.
"I am worried about the valuations of larger companies, they seem inflated, such as Henderson Land and Sun Hung Kai properties," he says. "The smaller companies are more attractively valued and therefore the downside risk is more in the larger companies."
Baillie Gifford has holdings in Chung Kong Properties and Kerry Properties, which is at a large discount to its asset value, according to Smith.
He also favours Swire Pacific, a conglomerate a large part of whose value is accounted for by office property. As the office property market has been improving, the company looks attractively valued and is not a pure play on the property market, Smith says.
Hong Kong's residential property market is dependent on sentiment and in the past few months it looked as though it was improving but in more recent weeks the take up has been disappointing, Smith says.
"It is difficult to tell the cause of the slowdown but on the stock market the concerns about the technology sector and a slowdown in Asia may have affected the sentiment of the man on the street," he adds.
"Whether it is a blip we do not know but the fundamentals for the residential market are not bad. There is a bit too much supply at the moment but this should contract going forwards."
Salton says that although the property market is lacklustre at the moment the residential market is picking up in transactions and pricing.
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