Life might be better in the Hong Kong office market than the residential market next year.
Home prices are not likely to climb dramatically. Average income is forecast to rise only 2.8 per cent, rental yields are already less than blue-chip equity dividend yields, and rental income is insufficient to cover mortgage instalments. Mortgage rates are also poised to surge higher when the hot money leaves Hong Kong. Nevertheless, prevailing home prices should be sustainable if income stays firm and interest rates remain relatively low.
But the office market, especially among grade-A and B properties, looks better. The main reasons are the large differential between rents for grade-A and B offices in Central and other districts, and the lack of new supply in all office grades.
As recently as September, average rents of Central grade-A offices recorded by the Ratings and Valuation Department was $301 per square metre, while the figure was as low as $122 in Wan Chai and Causeway Bay, and $130 in North Point and Quarry Bay. The cheaper properties, which are just as good in terms of working environment, will be a powerful incentive for non-finance tenants to move away from Central.
Recent transactions reveal that rental yields are falling in the Central area. For example, yields on some grade-A office units at 9 Queen's Road Central are as low as 1.6 per cent, while a unit in ICBC Building is a more reasonable 4 per cent. Recent advertisements suggest that even some units at Lippo Centre can be purchased at a yield of only 3 per cent.
Actual yields after deducting management fees, rates and tax will be even lower. Property investment counters with grade-A and B office holdings outside Central will probably earn sharply higher rental income when existing leases are renewed next year.
All this brings me to an excellent company, but trading at rich valuation. The value of Hang Lung Properties (HLP) is relatively easy to evaluate compared to other residential property development companies as all of its properties for sale are completed. What catches the eye is the huge embedded profit from its available housing stock.