Investors eyeing HK told to look at firms with asset disposal plans

BY EUGENE MAHALINGAM

New benchmark: Investors can benchmark their offices to the winning bid for Murray Road in Hong Kong.

New benchmark: Investors can benchmark their offices to the winning bid for Murray Road in Hong Kong.

INVESTORS eyeing Hong Kong property stocks should look at companies with asset disposal plans, according to CIMB Research.

The recommendation comes following the recent sale of Murray Road by the Hong Kong government to Henderson Land Development (HLD), the property company owned by one of the country’s wealthiest families.

“We suggest that investors look at stocks with asset disposal plans as they can now benchmark their offices to the winning bid for Murray Road.

“As Murray Road’s land cost already exceeded the asking prices of some of these projects, we expect more disposals will take place,” the research house says in a recent report.

HLD beat eight competitors to buy the first piece of prime commercial land offered for sale in Central (central business district of Hong Kong) in two decades, for a record HK$23.28bil (RM12.96bil).

According to reports, the plot of land can be developed into a commercial building with 465,005 sq ft of total gross floor area. This translates into HK$50,064 (RM27,865) per sq ft.

CIMB says the selling price was 10% above its expectation and marks a record-high land price in Hong Kong.

“HLD plans to build a 31-storey Grade A office building with floor area of 15,000 sq ft. Assuming unit rent of HK$140 (RM78) per sq ft per month and all-in cost of HK$64,000 (RM35,622) per sq ft, the implied cap rate is 2.6%, in line with recent transactions in Central.

“The project will be completed in 2021.”

CIMB Research says it expects the rally on Central office rents and prices to continue.

“The next land supply in Central will not come before the second half of 2018, as the 2017/2018 land sale programme does not include office supply in Central.

“Meanwhile, vacancy in Central stayed at 1.5% in March and demand from mainlanders (China) remains solid year to date.”

The research house adds that macroeconomy and the finance industry remain supportive, with Hong Kong’s gross domestic product growth accelerating to 3.7% year-on-year in the first quarter of 2017 and China’s regulator approving the mainland-Hong Kong bond connect scheme.

Despite losing the bidding for Murray Road, CIMB Research says developer Cheung Kong Property Holdings Ltd (CKP) can still benefit from it.

“As CKP’s Hutchison House is next to Murray Road and closer to the harbour front, we believe the building should be worth as much or higher. We expect CKP may soon dispose of or redevelop it in order to unlock its value.

“As the second-largest office landlord in Central, CKP also has the option of disposing of The Center. We estimate the two buildings to be worth a combined HK$50bil (RM28bil).”

The research house says it is positive on HLD’s investment in Murray Road as it is quality asset at fair price.

“The project can generate HK$700mil (RM390mil) net rental income annually upon completion in 2021. According to the media, HLD has been listing a dozen of assets for sale over the years.

“Three projects have been disposed of for HK$3.2bil (RM1.8bil) year to date. Other potential disposals include 18 King Wah Road and Manulife Financial Centre; these two are already worth a combined HK$26bil (RM14bil), in our estimate.”

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