REIT ASIAPAC MAGAZINE REITASIAPAC AUGUST 2020 ISSUE | Page 8

REIT ASIAPAC
physical presence, particularly to keep footfall in shopping
centres high. International retail brands will continuously
re-assess their physical presence in Hong Kong, keeping in
mind that there are more lucrative options in the mainland
or other alternatives around the world with potentially better
prospects.
Office tenants, impacted by the uncertain political
environment, are currently in a wait-and-see situation before
they commit to another lease period or decide to reduce
space. Given the travel restrictions, demand from mainland
China has cooled down significantly. Amid subdued demand,
the office vacancy rate in Central has hit its six-year high.
According to JLL, the overall office vacancy stood at 7.2%
in April 2020, the highest since October 2009. The best
fundamentals are currently seen in industrial, logistics and the
data centre space. Most of the corporate real estate owners
in Hong Kong are not in a forced seller-position, as leverage,
in general, is low and pockets are deep. Although valuations
for commercial real estate will consequently soften due to
weaker fundamentals, bargain hunters who are hoping for a
lucky asset deal will most likely be disappointed.
Global investors should, however, consider the large
yield spread resulting from direct-to-indirect property
investments. While cap rates of 3% are quoted for direct
commercial property transactions, the listed real estate
market offers discounts to NAV (net asset value) of up to
70% for developers. Hong Kong landlords currently trade at
approximately 60% discount as sector average and discounts
for Hong Kong REITs are from high teens to more than 70%
with implied cap rates closer to 6%. This large yield gap should
attract investors to switch into the listed real estate sector.
Given highly attractive implied cap rates, the industry should
see further privatisations of listed real estate corporations.
Lastly, the most recent proposed amendment of the Hong
Kong REIT code by SFC (Securities & Future Commission)
should enable REIT managers to create further corporate
value with enhanced flexibility.
Diversion of HSI and Hong Kong REITs
105
100
95
90
85
80
75
70
65
60
12/31/19 1/31/20 2/29/20 3/31/20 4/30/20 5/31/20 6/30/20 7/31/20
GPR/APREA HK REIT rebased
HSI rebased
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