In 1Q2018, Hong Kong recorded the highest level of expansion in seven years as its GDP grew 4.7 percent year-on-year (yoy). This was mainly attributed to a strong growth in exports and consumption that was driven by a recovery of visitors to the Special Administrative Region from Mainland China. Hong Kong’s strong economy is seeing the lowest unemployment rate in 20 years at 2.9 percent.
Based on the commencement of operations of the HK-Zhuhai-Macau bridge and high-speed railway, total visitors to Hong Kong from Mainland China is expected to be boosted by five million to 26 million visitors from 2018 to 2023.
Based on the assumptions from CIMB Research, the increase in visitors will boost retail sales by 5 percent, 16 percent and 29 percent in 2018, 2019 and 2023 respectively when compared against 2017 figures. Here are 3 Hong Kong-listed property stocks to buy as retail outlook becomes brighter.
Late last year, The Wharf Holdings spun off seven properties into Wharf REIC. The seven properties are Harbour City, Times Square, Plaza Hollywood, Crawford House, Wheelock House and The Murray. Among which, Harbour City and Times Square saw strong retail sales growth of 37 percent and 23 percent respectively in 1Q18. The stronger than expected retail sales growth is expected push for higher rental reversions.
Harbour City is likely the biggest beneficiary in the portfolio given that it is one of the most popular malls among Mainland Chinese visitors, known as a large mall and offering of major luxury brands. In addition, its close proximity to a high-speed railway station will benefit it as the new railway commences operations.
On this note, Harbour City is likely to see stronger contribution from the turnover component of the rent. Analysts from CIMB Research upgraded Wharf REIC to “Buy” with a target price of HK$68. For FY17, Wharf REIC has a dividend yield of 3.3 percent and the projection for FY18 is at 3.43 percent.
The flagship properties of Hysan Development include Hysan Place and Lee Garden which are located along the main shopping district of Causeway Bay. Given its prominent location, the properties are beneficiaries of the recovery of high-end retail shopping segment that is driven by the increase in visitors from Mainland China. The properties recorded a sales growth of 30 percent in 1Q18 which outperformed the industry average 14 percent.
For the past three consecutive years, Hysan Development has recorded negative rental reversion for its retail portfolio. On the back of the recovering local economy and increase in visitors from Mainland China, a rental reversion in FY18 is expected to turn positive, driven by turnover rent recovery. In addition, the opening of the retail podium in Lee Garden Three will add on to its retail rental revenue.
As demand for Grade A office in Central remains strong, it is expected to benefit offices located at the fringe of Central as the rental gap between Central and outside Central widens. With a portfolio of office properties in Causeway Bay, Hysan Development is expected to benefit from the growing rental. In addition, Lee Gardens Three was completed and delivered to tenants in 4Q17 and is expected to account for approximately 10 percent of Hysan Development’s office rental in FY18.
Analysts from CIMB Research gave Hysan Development a “Buy” call with a target price of HK$54.60. The dividend yield for in FY17 was at three percent and is projected to be at 3.3 percent for FY18.
Swire Properties owns Pacific Place, Citygate Outlet and Cityplaza that registered a growth of 25.9 percent, 7.7 percent and 11.7 percent respectively. Among the three properties, Pacific Place is well-known as a high-end retail mall. The stronger sales growth in comparison to the other two properties clearly displayed that the high-end retail segment’s is recovering strongly amidst a return of visitors from Mainland China.
In the office segment, office rental income grew by one percent in FY17 despite the absence of contribution due to the redevelopment of Taikoo Place. This was contributed by the strong rental reversion of three percent to 15 percent of its office properties in Pacific Place and Island East portfolio. Projection for FY18 remains positive for Swire Properties’ office portfolio and is expected to see further rental reversions.
A potential special dividend may come from the sale of two office blocks in Cityplaza and is able to help Swire Properties unlock value for shareholders. Analysts from CIMB Research reiterated their “Buy” call for the stock with a target price of HK$35. Currently, the projected dividend yield for FY18 is at around three percent.