Concrete Analysis | Uncovering value when it’s hidden by the price
The true value of a property investment is in how an area is likely to evolve, not simply the transaction price
“Price is what you pay, value is what you get.” – Warren Buffet.
The best long-term investments are frequently questioned at the time of transaction by market scribes, with current pricing used to validate decisions. However, this focus on price, particularly in the context of previous transactional evidence, can be misleading and misrepresents the most critical component – value.
The Lands Department recently announced that Sino Land and Empire Group had won a plot of land in Wong Chuk Hang with a bid for HK$2.528 billion, a record price per square foot in the area. This raised eyebrows among some observers who queried the upside potential of the transaction. However, the reality is that Wong Chuk Hang will undergo radical transformation over the coming years, the result of (i) huge infrastructure improvements brought about by the upcoming new MTR line, (ii) improved commercial stock as developers and investors recognise the potential, and (iii) a major upscaling of the occupier base as large corporations are attracted by these two elements.
To establish the value of the purchase by measuring prices paid previously in the area is not comparing “like with like”
To establish the value of the purchase by measuring prices paid previously in the area is not comparing “like with like”. One must consider how an area is likely to evolve into a destination and how this translates into the alpha element of project returns, over and above the beta return delivered by the Hong Kong market as a whole.
Just five years ago Kowloon East was considered by many professionals in the real estate industry as not suitable for large multinational companies. It was too far away, the buildings were not up to scratch, services were not available and, most of all, it was not Central! Indeed, it was hard to get Hong Kong Island occupiers to view buildings in Kowloon East during the supply boom of 2006-2008. However, as the saying goes, build it and they will come. In one month, September of 2008, over 2 million square feet was added to the market through the completion of four new office buildings, sending the vacancy rate above 35 per cent almost overnight. Not only was this space filled; it also provided a platform for strong rental growth in the area.
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill
All of this should appear logical in a market as physically constricted as Hong Kong. First-mover advantage here has proved to be particularly rewarding in the commercial real estate sector.