HK property stocks – time to shine vs HSI and physical? [Article 2 of 2] 20230531

Now that we have concluded in Part 1 that property stocks will outperform inflation in the next few years, we need to consider whether the larger stock universe, say represented by the Hang Seng Index (HSI) or underlying property could do even better. Here we delve into the relative merits of various peer classes.

We are more bullish on property stocks than the underlying

Deploying similar yield differential study between the HSP and residential property, we can detect four distict turning points in the relative values between HSP and physical: mid 80s and early 2000s stock peaks (red texts) and 1998 and 2022 (ie now) troughs (blue texts) when HSP reached at their cheapest extremes against physical:

Chart 1: HSP yield swings from one extreme to another, we seem to be at the cheap extreme right now

Our technical analysis derived rental yields should see the value go from c.3% now towards 4% handle by 2025, while the extremely high 5-6% returns on HSP should swing the other direction when the huge stock premium (green area in Chart 1) turns into a discount. We project that by end 2024, HSP dividends would still be higher than property rents in yield terms, and likely to trade lower towards the other extreme around 2026 (green arrow in chart).

Property stocks should beat other sectors not holding real assets

The massive tech bubble driven by zero interest rates and QE of the last five years is now over, and we should now see a period of persistent tech underperformance given how the yield relative is at an all-time high (Chart 2). Indeed, the distortion is also the most extreme thanks to covid policies (endless govt handouts and deficit spending while rates were kept at zero). When this valuation anomaly swings the other way, we will see a period of very strong property stock outperformance:

Chart 2: The record dividend difference between HSP and HSI suggests HSP is very under valued

If the yield premium shrinks from the 2% region to -0.75% end (which was the norm during 2003-2015, then some significant outperformance might be in store for the HSP... The current cheapness of physical asset (as represented by high yields in HSP) could be further exacerbated if we consider the new deglobalisation trend where lockdowns and geopolitics may reduce the earnings (and thus returns) of trading/finance related sectors much more than the beaten down property sector.

HSP a safe haven vs govt bonds

At the most liquid end of the peer spectrum, we come to govt bonds as the final leg of analysis for our study. Here the relentless underperformance of the property stock sector (since 2013) reached a peak in 2022 when HSP yields breached 7% (blue line in Chart 3 & 4). However, the reversal in bond yields also began in 2022 when treasury as well as interbank rates spiked the most in the last 40 years, precipitating a reversal in yield premium for HSP vs bonds/bank rates. If this reversal is taken to their respective extremes in the next 3 years or so, we could see HSP also outshine bonds or even deposits...

Chart 3: The HSP yield premium vs US TB should see massive narrowing in coming years

 Chart 4: … similarly for HSP yields against HIBOR

All this could point to a very unusual set of circumstances – in the next two years or so, that despite being rate a sensitive sector, HK property stocks are probably at its most resilient compared to all its main rival asset classes, and could be a real safe haven in the turbulent world we will soon enter, even if we factor in some punchy drops in rents to come in such a chaotic environment, because the prices are pricing in so much distress already...

The author would like to thank Chen Hailan from The University of Hong Kong majoring in Economics and Finance, Leung Kin Tung Sam from The Chinese University of Hong Kong majoring in Quantitative Finance, and Wong Ngai Fung Wallace from The University of Hong Kong majoring in Wealth Management for assisting in data collection, analysis, and drafting this article. 

明報專訪 Mingpao Interview 2 of 2 - HK should continue as a hub of low tax and low regulation 20230512

Below is the second instalment from your correspondent's Ming Pao interview on HK's economy and global positioning, in the context of tax competitiveness and web3 race amongst jurisdictions:

1) Cryptocurrency 

- Cryptocurrency will likely replace gold which is physically difficult to carry and is now hunted across most international borders - whereas crypto allows more liquidity, flexibility and privacy and is a far superior means of wealth storage

2) Hong Kong's regulation on Cryptocurrency / Digital Assets

- Intangible assets, such as Crypto, are invented to protect privacy and to disintermediate and cut costs
- Money laundering as an argument to crack down on cryptos is a false argument - USD cash is multiples more prevalent as a medium for illicit money laundering
- The current spate of persecution of crypto ecosystem in the USA is the result of power grab by various regulatory bodies, each trying to carve out its own territory ahead of the other (SEC, CFTC, Fed, FDIC, etc) and gives light touch jurisdictions like HK a best chance to seize leadership 
- Some of the biggest crypto businesses started in HK, such as FTX, Bitmax, Binance, Huobi, Bitfines, and OKX - now is the time to attract them and others to domicile here while the US is in disarray

3) HK should resist joining the global tax hunt (started by USA)

- New innovations such as Crypto should be allowed to grow with minimal government intervention
- HK's tax future should be no corporate/income tax but more on land and consumption tax so as to attract all businesses fleeing the tyrannical western high tax regimes. Calls for 'widening the tax' base are vested interest groups (ie academics and accountants) trying to enlarge their pie at the cost of tax paying people
- By being a tax friendly regime, HK now has the backing of China so need not bend its knees to high tax countries. In so doing, the city will attract far more talent and capital and businesses than any promotional schemes giving away free air tickets can achieve.

For more details see below video clip: 

General Disclaimer - where quoted in media reports, your correspondent does not exercise control on editorial policy and therefore what appears in the publication may not coincide, or even rarely, contradict your correspondent's views... 

For instalment 1, please see here.

明報專訪 Mingpao Interview 1 of 2 - Global Economy + HK Property 20230504

Below is the full interview with Ming Pao published on 4th May 2023 in which your correspondent discussed a variety of macro and property market topics, including:

1) International Military Conflicts

- Ongoing war could trigger significant capital flights from EU. 

- The Russia-Ukraine War and associated sanction have caused damage to EU and all associated countries. 

- The geopolitical conflict will likely extend to North-East Asia. 

2) Hong Kong Real Estate Market

- Remains bearish on HK housing.

- Follow the money, go where infrastructure is happening. 

3) The Southern Hemisphere

- Risk of WW3 continue to rise, lower risk in Southern Hemisphere. 

- Avoid Noerthern Hemisphere - especially financial centers! 

- Singapore is a viable option to allocate investment exposure.

- Cambodia is another area of interest given its currency advantage with the USD and its political stability.

- Given inflation forecast and continuous demand for commodities, Australia stays on the investment-worthy list.

General Disclaimer - where quoted in media reports, your correspondent does not exercise control on editorial policy and therefore what appears in the publication may not coincide, or even rarely, contradict your correspondent's views... 

葉創成：王震宇：買港樓自住 要不怕樓價跌

【明報專訊】本港樓價今年首季回升近7%後，本季以來已轉趨橫行偏軟，後市將會何去何從？今期本欄專訪瑞銀前房地產研究部主管、Bricks & Mortar Management主席兼總裁王震宇就此分析。王震宇表示，對於打算長期在本港居住及工作人士來說，若有能力負擔，而且亦不怕樓價跌，買樓自住仍屬可取；但他強調，美國政府現已由主戰派當道，去年俄烏戰爭爆發後，未來兩、三年東北亞出現戰爭的風險不容低估，故買樓投資宜選新加坡及柬埔寨等東南亞國家。

香港黃金五十創辦人林奮強於2月2日在本欄認為，由於本港經濟最大客戶來自內地，恢復與內地通關屬重大利好，料打工仔今年加薪理想，可帶動樓價上升5%至10%。而林奮強在2003年任職瑞銀華寶亞洲有限公司地產研究主管時，王震宇曾是他的下屬，兩人在2003年樓價處於低位時曾一同撰寫報告，預言樓價兩年看升六成，而結果跟着兩年樓價勁升逾八成，可見預測相當準確，加上兩人在2002年開始買入不少九龍站或奧運站住宅，把握到跟着10多年樓價數以倍計的升浪（見圖），把研究預測付諸實際行動賺大錢，屬本港投資界及地產界的佳話。

於2011年底、2012年初，王震宇自立門戶成立Bricks & Mortar Management，為客戶在全球房地產市場尋找投資機會，而他上周四應約在集團辦公室接受訪問，分析本港及全球樓市走勢。

他指出，自己已一段時間沒有與林奮強聯絡，而本港樓價今年以來已上升約7%，可見林奮強年初的預測亦屬正確，而他也認為港人若有自住需要及能力，又可承受樓價下跌，目前買樓自住亦屬可取。

買樓自住帶來安全感 非單純投資

王震宇表示：「假如你的目標是用錢來買一個住宅單位安心自住，以便室內裝修可以由自己全權決定，亦可以避免出現租樓時可能被業主迫遷的情况，也即是說，你的目標不是保本、唔驚樓價跌的話，覺得買樓自住帶來的安全感高於資產回報的重要性，你便去買吧！」

既然王震宇上述已表明「不怕樓價跌便可買樓自住」，與他在2003年預測樓價兩年升六成，明顯已轉趨保守，他表示，當年住宅租金回報率遠高於按揭利率，出現明顯的「淨收益率」，是其時利好樓價的關鍵因素，惟隨着樓價過去20年急升，加上去年開始本港跟隨美國踏入加息周期，而息口在可見將來料仍高企，此利好因素現已不再存在。

美向韓派遣核潛艇 憂東北亞爆戰爭

更重要的是，王震宇認為，去年2月俄烏戰爭爆發至今已逾14個月，全球地緣政治緊張局勢持續，他擔心在未來2、3年戰火可能會蔓延至本港所在的東北亞，故此，他認為本港樓市目前沒有投資價值，並指Bricks & Mortar Management若有可自行決定配置的新資金，也不會投資於本港樓市：「美國過去數十年在全球建立軍事基地、多次發動戰爭，原因是軍工商是美國政客的主要捐款來源之一，而目前美國鷹派執政勢力很大，基本上的傾向便是好戰，故此除了俄烏戰爭短期料不會結束外，美國近日更宣布擬自1981年以來首次向韓國派遣核潛艇，此一舉動令我擔心戰火未來2、3年將由歐洲蔓延至東北亞」。

資料顯示，王震宇於2019年已以2280萬元沽出九龍站擎天半島一個中層單位，相對於2007年的買入價798萬元，帳面升值近2倍，換言之，他早於4年前已減持部分港樓鎖定利潤，不過訪問中他拒絕評論個人的投資行動，只說：「總之短期公司有新資金也不會投資本港」。

看好南半球較開明國家

與對投資本港樓市持審慎觀點比較，王震宇目前看好新加坡樓市，「俄烏戰爭去年2月爆發後，不少國際投資者已從歐洲房地產市場撤離，主要投資於美國及南半球比較開明的國家，此趨勢料維持兩、三年，若東北亞擦槍走火出現戰爭，此走資潮更會加快。當中，美國房地產稅制比較複雜，不利長期持有，所以我們沒有參與該市場，而在南半球比較開明的國家中，新加坡房地產明顯是投資之選」。

他透露，Bricks & Mortar Management早於2017年已買入新加坡商業房地產，至今亦錄得逾五成的價格升幅。

農產品高通脹料持續 買澳紐農莊酒莊

在東南亞房地產市場中，除了新加坡外，王震宇亦看好柬埔寨物業：「首先，柬埔寨房地產是美元資產；第二，柬埔寨亦政治穩定，首相洪森已執政逾20年，起碼穩定過泰國」。

另外，王震宇亦因應全球未來高通脹持續的預測，在澳洲及新西蘭買入一些農莊及酒莊。

買樓跟着基建走 北部都會區可尋寶

【明報專訊】王震宇在2011年7月接受《明報》訪問時建議「買樓要跟着基建走」，指當時特首曾蔭權提出的十大基建工程，包括廣深港高鐵會惠及附近地區，故看好奧運站及九龍站住宅，並指「港島西亦會有港鐵線支持，整條西鐵及東涌線沿線都可以考慮」，可謂測中過去逾10年本港西面地區樓價跑贏東面地區的趨勢。

既然王震宇在是次訪問中指港人若現有自住需要、有能力及不怕樓價跌，買樓仍可取，那麼買哪些地區好呢？未來20年擬大興土木的北部都會區是否首選呢？

基建若3至5年後落成 始利好樓價

王震宇表示：「買樓從來、永遠都要跟着基建走，大市點走都好，有基建的地方一定跑贏無基建的地方，若從此角度出發，由於本港未來只有三個地方會有真正的大量基建及土地供應出現──北部都會區、中部水域人工島及屯門龍鼓灘填海，你便可從中看看有何投資機會。值得注意的是，基建要在3至5年後落成，才可以真正影響樓價，北部都會區範圍很大，包括古洞北/粉嶺北、洪水橋/厦村及元朗南等，如果你熟悉規劃、知道哪些基建快落成，是有投資機會的；作為比較，中部水域人工島及屯門龍鼓灘填海等基建在未來10年估計也不會出現，料不足以導致區內或附近樓價短期跑出」。

明報記者 葉創成

----------------------------------------------

請前往作者YouTube頻道觀看更多視頻: 王震宇宇論 Yulun

HK property stocks – is there light at the end of the long tunnel? [Article 1 of 2] 20230502

The Hang Seng Property Index (HSP) has had a rough few years in performance, not only has the benchmark for Hong Kong property stocks massively derated since the peak in 2018, but it is now arguably stuck at a level seen as early as Q4 1996 – which is 27 years ago!

But with the index now loitering at the bottom of its trading range since 2007, and inflation very much returning after a long period of disinflation in the global economy, could an argument be made for investing in the sector again for some inflation hedged outperformance in the coming months or years? We will start by looking at how inflation might pan out in the coming months…

Inflation likely rising higher and for longer

Although benefiting from a strong USD which ameliorated upward price pressures which has been a global phenomenon, inflation in Hong Kong is unlikely to stay too low for much longer, especially now that the world is heading increasingly towards: a) deindustrialisation in the west thanks to zero-carbon madness; b) deglobalisation due to increasing polarisation of the BRICS vs 5-eyes power blocs; and c) continued world war 3 risks which could erupt at any moment – further destroying already badly disrupted supply chains post covid lockdowns.

In this context, we have done a technical analysis derived forecast of HK’s inflation for the next two years, and the result is shown in the red line in Chart 1. As is customary in past inflationary cycles, whenever the CPI rises (red arrows), property as an inflation hedge becomes sought after, resulting in the HSP dividend yield trading at increasing discount to inflation (green arrows):

Chart 1: Base Case market might buy property stocks as inflation hedges, even when they yield 2ppts lower than inflation… 

Chart 2: And in a more extreme scenario, even 5ppts less, should world affairs become more perilous

We believe this pattern will repeat in the coming 2-3 years, resulting in the HSP yield discount to CPI to hit what is quite achievable -2% levels by end-2025 (rightmost green arrow in Chart 1). But given how extreme geopolitical crisis could play out in the near future, perhaps a more pronounced -5% discount might not be out of the question (rightmost green arrow in Chart 2).

To visualise how the yield discount translates to HSP index performance, we have put them on the same chart. One clear pattern that emerges is that the relative yields of property stocks are highly cyclical against underlying inflation, as seen by the multi-year discount-premium swings (green arrows). We are likely on a “premium to discount” run right now, and this may be a big safety factor in favour of property stocks – when inflation rises, market required yields could still hold at their current levels, or at worse, rise by a much smaller magnitude compared to inflation itself, resulting in a potential discount in the coming months:

Chart 3: Possible more than doubling of HSP assuming dividends stayed constant while yields trade at discount to inflation

HSP index as implied in our base case scenario of yields at a 2%-point discount to CPI suggest a possible new all-time high in HSP price in Q1 2025, but having first drop further in the near term (red line above).

So how does index movements (capital return), dividend yields (income return) interact with inflation over the cycles? We have decomposed the total return profile (orange line in Chart 4) into its components – blue area represents dividend yield and green area capital movements, and the main patterns that emerge are:

a) Capital returns are almost always more volatile than both the yield and inflation movements, but tends to move in the same direction as inflation (ie green arrows follow red arrows in Chart 4);

b) Dividend yields on the other end tends to be the more stable element of the three, but also by and large is swayed by the trends in CPI (see magnified view in Chart 5, where blue arrows tend to also follow red arrows):

Chart 4: Capital fluctuation is more pronounced than inflation/dividend yield

Chart 5: Dividend yields likely to rise but may be overtaken by inflation in coming months

To conclude, we think the rightmost blue arrow in Chart 5 will rise as inflation accelerates, but could be overtaken by the latter in the coming 2-3 years, partly also cushioned by the current near record high dividend yields trading in the sector – a good safety margin in deed.

Long cycle of yield premium cycle favours property stocks

The premium-discount oscillation we alluded to in Chart 3 above is represented in a more schematic way in the summary chart below – this suggests that stocks remain cheap as they now stand compared to inflation, and as the pendulum swings to the other extreme (likely reached in 2026), stocks will then be expensive and investors should sell at that time:

Chart 6: Relative value is like a pendulum – swinging from one extreme to the other

Of course, such cycles will vary in both the magnitude (e.g. next cycle could end at the red dotted line of -4.5% or so, or exceed the prior extreme to go beyond -7%) and frequency (so the 9 year time frame that we assumed it will reach the expensive extreme might take more or less in reality). We will obviously assess whether the extreme is reached when we see it, but it is safe to say that at the current levels, stocks are not a high-risk way to hedge against the oncoming inflationary wave.

We will in the next instalment look into whether stocks are a better hedge compared to bonds, or HSI or even physical property by employing similar premium/discount analyses. Watch this space…


The author would like to thank Wong Ngai Fung Wallace from The University of Hong Kong majoring in Wealth Management and Chen Hailan from The University of Hong Kong majoring in Economics and Finance for assisting in data collection, analysis, and drafting this article.