Hong Kong equities are being helped by the strong recovery in the property market. In the year to da...
Hong Kong equities are being helped by the strong recovery in the property market.
In the year to date the Hang Seng property index has risen some 27.5% in local currency terms, and is up some 80.51% on a 12-month view. As property is responsible for about half the equity market's performance, it is no surprise that the Hang Seng has gone up 44.37% in local currency terms.
William Russell, assistant director of Pacific Basin equities at Royal & SunAlliance, says property has reached the bottom of its cycle and he expects it to pick up in the second half of 1999 as confidence grows.
Russell is positive on the equity market, saying that unemployment is stabilising, interest rates have fallen considerably and are expected to fall further. He says underlying demand remains strong with a steady flow of immigrants helping to boost it.
The residential property market is rebounding faster than the commercial property market and there is a surplus of office capacity, caused by a glut of building when the economy was strong three years ago, says Russell.
He adds: "Our preference would clearly be for companies that are generating surplus cash and investing in the residential property market."
Recent land auctions by the Hong Kong government went better than market expectations but prices are stronger in the secondary market rather than in new properties.
John Hayter, senior Far East manager at Pavilion, says: "Developers are more concerned about cash flow than profitability and they want to get sites completed and occupied, while people in their own homes are less willing to take a lower price."
Russell believes this attention to cash flow could be a dampener on property prices because of the aggressive way the developers are releasing investment units in an attempt to raise money to buy new land releases from the government.
He says: "The process of them selling their own units will be that you continue to get a dampening in the price rise."
This, combined with the amount of property available on the market and the state of the economy, means the recovery would be more measured than in the past and Russell expects price growth of around 10% to 15% on an annualised basis in the next six months.
Hayter says: "Returns are likely to be more measured now Hong Kong is being run by the Chinese, rather than the laissez-faire administration it had as a colony."
Royal & SunAlliance remains overweight in property compared with its peer group.
Russell says: "The groups that are poised to benefit are those that have the balance sheet and financial resources to buy new land from the government at extremely attractive prices."
Royal & SunAlliance favours the larger groups such as Cheung Kong, Sunhungkai Properties and Henderson Land.
It also likes a smaller company, HKR International, which has focused on Lantau Island for its purchases. Lantau is the site of the new airport and the place Disney is looking to build a new theme park. If Disney gets the go-ahead, land prices on the island would increase heavily.
Pavilion remains overweight in property with about 37% of its Hong Kong property portfolio in real estate compared with the 30% for its benchmark.
Hayter says: "This is because the market in residential and commercial is recovering.
"It was heavily oversold in October and the market justifies the share price we are seeing at the moment. There is more to come on the property side."
Susan Currington, investment manager at Norwich Union, says the group is neutral on the asset class and favours property developers over property investment companies.
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