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Property developers depend on real estate values to make money. They buy greenfield land, develop the land into residential or commercial units, and sell the developments ideally for a profit. Some developers also keep built units in their portfolios and become hybrid holders of land and developers.
Developing land has historically been a great business for the big Hong Kong land developers. Due to the limited market supply of land, demand from mainland Chinese buyers looking to diversify, and the city’s strong economic growth, Hong Kong property prices have risen strongly. Higher property prices generally mean greater margins for the developers.
However, the protests that started in June and the trade tensions between China and the US have some analysts predicting zero home price growth for Hong Kong in 2019.
So clearly it could be a bad year for the residential property sector but the office sector isn’t immune either. Vacancy rates for Grade A offices in Hong Kong’s Greater Central rose to 2.3% in the second quarter of 2019, the highest since the first quarter of 2015.
Given the bearish developments across the industry, shares of Hong Kong’s big four property developers – New World Development Company Ltd. (SEHK: 17), Henderson Land Development Co., Ltd. (SEHK: 12), CK Asset Holdings Ltd (SEHK: 1113), and Sun Hung Kai Properties Limited (SEHK: 16) – have all declined since the beginning of the anti-government protests.
But which large Hong Kong property developer is the most defensive for investors who want to hold their shares over the longer term?
What the market says
From the year-to-date perspective, shares of all four developers topped or were very close to their tops around March/April. Of the four, Henderson Land Development has fallen the least.
Since 1 April, Henderson Land Development declined ~17%, Sun Hung Kai Properties fell around 18.7%, New World Development fell around ~20%, and CK Asset Holdings did the worst of all; falling around 26%.
Henderson Land operates in both the commercial and residential sectors. Shares didn’t fall as much because it has a strong financial position. As of the end of June, Henderson Land had a strong balance sheet, with financial gearing ratio of 24.2%.
Its interest coverage was 7 times for the first half of 2019 and its effective borrowing rate was just 2.62%, indicating that creditors view the company’s cash flows as very strong.
In terms of prospects, the company believes FY2019 operating performance will be stable barring unforeseen circumstances. Henderson Land also has a solid track record of paying dividends, with its dividend per share (DPS) increasing every year from 2014 to 2018. Shares currently yield around 4.3% according to aastocks.
The good news is that the trade tensions between the US and China could improve given the progress made in recent talks. If the trade war ends, growth could rebound in both China and Hong Kong.
Hong Kong’s government has enacted stimulus measures that will help the local economy and the government is expected to make available more land for the development of housing for low-income people to address some of the underlying economic reasons behind the protests. More opportunities for development could mean more business for Hong Kong’s big developers.
If and when the protests end, there is reason to believe that the effect of the protests on property values could be short-lived. Office rents rose 0.2% after the first month of the 2014 Umbrella Movement protests. Tourism rebounded after the SARS crisis in 2003. Prices have rebounded before, particularly when Hong Kong suffered from SARS – which was arguably worse for the economy.
The protests in Hong Kong have hurt property values in the city. Given the discounts to their previous highs and the potential for a rebound if the protests end, Hong Kong’s big four property developers could prove to be good buys for investors over the long run.
Of Hong Kong’s four largest property developers, I believe Henderson Land offers investors the most defensive large developer/property play.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.