In a stark contrast to the robust performance of real estate investment trusts (REITs) in other major markets, Hong Kong’s REIT benchmark index has plummeted by more than a quarter this year. This alarming decline is attributed to a multitude of factors, chiefly the exodus of investors from China-linked assets.

S&P’s REIT index for Hong Kong has witnessed a harrowing 26% drop between the close of last year and Friday. In stark contrast, REIT indexes for Australia, the United States, and Japan have all recorded gains of 9%, 5%, and 4%, respectively.

A primary factor contributing to this dramatic decline is the widespread aversion to China-exposed assets across global markets, including stocks. The implementation of Hong Kong’s national security law in 2020 effectively eroded the “one country, two systems” framework, which had previously granted the territory a high degree of autonomy. Consequently, the Chinese Communist Party now wields greater influence over Hong Kong, instilling fears of regulatory risks among investors.

The ramifications of these concerns have rippled through the Hong Kong real estate market, causing it to stagnate. Office vacancies surged to a record high of 15.7% in the second quarter, as reported by real estate service provider CBRE. Vacancies in the Central business district breached double digits for the first time, reaching 10.1%. These developments have exerted headwinds on the profitability of REIT properties.

Rising interest rates have also played a pivotal role in this downturn. The 12-month Hong Kong Interbank Offered Rate currently hovers around 5.2%, having surged approximately 100 basis points since the end of March. Elevated borrowing costs exert downward pressure on REITs, which heavily rely on leverage.

August saw HSBC downgrade Fortune REIT from a “buy” to a “hold” rating, in response to a 2% year-on-year decrease in income available for distribution for the first half of the year. Hong Kong’s currency pegged to the UI.S. dollar means that the territory’s monetary policy mirrors that of the U.S., leading to rate hikes that may not necessarily align with local economic conditions.

A third contributing factor is the underwhelming performance of Hong Kong’s Link REIT, one of the largest REITs in Asia by market capitalization. Despite raising 18.8 billion Hong Kong dollars ($2.39 billion) through a rights issue in March, Link has not made significant property acquisitions. Investors voiced concerns over what they viewed as unnecessary fundraising that diluted the dividend per unit.

Daisuke Seki, CEO of IB Research & Consulting, specializing in REIT market trends, commented, “There is little indication that Hong Kong REITs will recover.” However, Seki added, “Investors will likely shift their focus to a market like Singapore, known for its strength in Asian REITs.”

Signs have emerged that investment capital is indeed flowing into Singapore. A fund managed by Sumitomo Mitsui DS Asset Management reduced its allocations in Hong Kong REITs by 1.3 percentage points, down to 9.1% at the end of July compared to the previous month, while Singapore REITs gained 0.7 percentage points, reaching 49.7%.

Etsuro Akiyama, Head of the REIT Group at Sumitomo Mitsui DS Asset Management, cautioned, “This is not the time to purchase Hong Kong REITs, no matter how discounted they are.” Meanwhile, S&P’s index for Singapore REITs has been showing signs of positivity, albeit slightly.

In contrast, the REIT markets in the United States and Australia have remained robust, buoyed by the relative strength of their economies compared to China. Both U.S. and Australian REITs are perceived as attractive investments, with values having declined by approximately 20% in both markets last year.

Photo Source: Google

7th September, 2023
By: Delino Gayweh
Serrari Financial Analyst