Hongkong Land Holdings

[beefjerky]

Most properties are valued at about 5% yield, or cap rate. Or to put it in another way, a p/e ratio of 20.

In such a simplified equation, the value of a property = income of property x 20

So if income of property goes down, so does its valuation. And vice versa.

Hence, the 'intrinsic value' of HKL depends on your assumptions about HKL's future. Will it earn higher rents from its offices, and higher profit from its development properties?

HKL's present valuation (p/underlying earning of about 10, excluding revaluations) suggests that its future income is going to come down by half. It is up to an investor to decide if that is true.

I think I am clearer now. So what you are saying is, HKland uses a low cap rate of 5% > resulting in an assumed P/E ratio of 20. However, because of the instability, we should use a higher cap rate, maybe 10% > resulting in a P/E ratio of 10 which is more reasonable seeing that the growth may not be that great? Is this correct?

[karlmarx]

Hi Karlmax,

May I know in your opinion is a reasonable cap rate to invest in a property company for OPMI? Thanks.

As mentioned, the market values most properties at about 5%. It varies depending on the type of property; residential, retail, industrial, or commercial. But generally, the ones which are perceived to be lower in risk will have lower cap rates.

It is up to an investor to decide how much they want to pay, or how much they think the cap rate of a property should be. Some of the factors which an investor may consider in their evaluation: management alignment with opmi, management's ability to create value, quality of the properties, future demand and supply of similar properties, and level of gearing.

Since my assumption is that the future of HK grade A office demand will be more similar to the past than otherwise, HKL looks cheap to me.

As for the impact of 2047 on the lease and valuation of HKL's HK properties, it is also something investors should weigh in their consideration. But right now, no one has a definite answer to that.

I think it is highly improbable for the leases to expire in 2047; that would be extremely destabalising for HK, and will probably result in the end of it. My current assumption is that they will be given a fresh 70 years lease. This issue will probably be addressed perhaps some time in 2037 or so.

[karlmarx]

I think I am clearer now. So what you are saying is, HKland uses a low cap rate of 5% > resulting in an assumed P/E ratio of 20. However, because of the instability, we should use a higher cap rate, maybe 10% > resulting in a P/E ratio of 10 which is more reasonable seeing that the growth may not be that great? Is this correct?

Let me try again. The market generally values properties at about 5% yield. These are the valuations which physical real estate change hands. 5% is generally not considered low. Low will be something like 3-3.5%. 

But HKL's stock market valuation implies that its properties are valued at about 10%. In other words, if you have the money to buy out the entire HKL at present stock prices, the rental income you will receive from its properties portfolio is about 10%. 

So what I'm saying is that, compared to the 5% which is what is usually demanded in physical real state transaction, the buyer of HKL stock can get it for half that price at 10%. 

10% is a very distressed price for properties, and there has been quite a few property-related stocks in SGX trading (or traded) at such prices. Which is why it is important for an investor to consider the factors surrounding the market's pessimism.

To me, 5% as a cap rate for HKL looks okay, but some may want to give it 7% or higher for the risks involved. As mentioned, your valuation of HKL will depend a lot on your assumptions about its future.

[beefjerky]

I think I am clearer now. So what you are saying is, HKland uses a low cap rate of 5% > resulting in an assumed P/E ratio of 20. However, because of the instability, we should use a higher cap rate, maybe 10% > resulting in a P/E ratio of 10 which is more reasonable seeing that the growth may not be that great? Is this correct?

Let me try again. The market generally values properties at about 5% yield. These are the valuations which physical real estate change hands. 5% is generally not considered low. Low will be something like 3-3.5%. 

But HKL's stock market valuation implies that its properties are valued at about 10%. In other words, if you have the money to buy out the entire HKL at present stock prices, the rental income you will receive from its properties portfolio is about 10%. 

So what I'm saying is that, compared to the 5% which is what is usually demanded in physical real state transaction, the buyer of HKL stock can get it for half that price at 10%. 

10% is a very distressed price for properties, and there has been quite a few property-related stocks in SGX trading (or traded) at such prices. Which is why it is important for an investor to consider the factors surrounding the market's pessimism.

To me, 5% as a cap rate for HKL looks okay, but some may want to give it 7% or higher for the risks involved. As mentioned, your valuation of HKL will depend a lot on your assumptions about its future.

Thank you for the patient explanation

[Choon]

https://www.youtube.com/watch?time_conti...e=emb_logo

Why other Chinese cities are not yet ready to ‘surpass’ Hong Kong

[Choon]

With the benefit of many months passed since the protest in Hong Kong started in 2019, it seems that time is the best medicine for bringing peace back.

Some things in life cannot be changed immediately, or rather the time has not come for great change to happen. Hong Kong's protesters would soon have to admit defeat. Their dissatisfaction (whether reasonable or not in the first place) would just have to be numbed with the passage of time.

With the risk of social chaos abating, would the market revert to its previous view and valuation for HKL before the onset of the protest?

(Just recording my investment thoughts)

[karlmarx]

There are still some stragglers but the threat of further mass movements as seen exactly a year ago -- where turnouts were several hundred thousands strong -- is certainly over. The protesters are worn out and have their livelihoods to worry about. If the government continues to make the right moves to appease anger (setting an example of some of its police officers) and win back popular support (such as its recent launch of mega public housing projects), the situation will likely continue to improve. But until the national security legislation is done and dusted, there will likely still be pockets of resistance.

Once that is done, the next key event is the resumption of unrestricted travel between HK and mainland. Until the pandemic on the mainland has been demonstrated to be completely eradicated, it is not likely that the HK border will be opened to mainlanders. Or Lam and her colleagues will like face another round of public attacks. Since there are reasonable concerns that the pandemic may resurface this fall, the earliest time when HK/mainland borders may be opened -- assuming there is no 'second wave' -- could be spring 2021.

[¯|_(ツ)_/¯]

29 July 2020 1H Result (as at 30th Jun 2020) HKL
https://links.sgx.com/FileOpen/HKLH.ashx...eID=625545

Rev USD820m (vs 803m)
Operating loss USD1.6b (vs 428m)
Loss after tax USD1.8b (vs 411m)

While second half underlying profits are expected to benefit from higher Development Properties completions on the Chinese mainland than in the first half, uncertainty remains about the duration of the pandemic and the effect it will have on the Group’s full year results. 

Wear mask and keep your social distance, everyone

[jaco]

This blogger published an essay about market inefficiencies, using Hong Kong Land as an extensive example. It touches on some points brought up by @karlmarx earlier:

https://lt3000.blogspot.com/2020/07/mark...heels.html

[amperex]

Thanks for sharing this illuminating article.