Posted by
OffThePeak
11 yrs ago
I am looking at a possible property investment in an older building, currently between 35-40 years old and refurbished (new lobbies, and new elevators) about 3 years ago.
I am wondering what people would consider to be an attractive yield in the current market.
We have seen several opportunities with Net Yields below 3.0%, and quickly rejected those.
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Assuming "net" means net of vacancy, rates, management fees, repairs and everything else and is calclated on gross cost (purchase price, stamp duty, agency, initial refurbishment etc), then the answer is "it depends".
If the objective is to generate yield, then I would look at equities as a comparison (recognising that there are significant differences between the two asset classes). If the objective is to realise a profit as/when the building is taken out by a developer, then you have to guess how much the developer will pay and when and then allow for the considerable uncertainty involved in such a plan by getting enough passing income to compensate you while you are holding the property.
At this stage of a bull market, i'd also want to recognise the possible impact of increased supply and rising interest rates and additional cooling measures.
All this is a bit vague, but at net yields below 4%, I'd rather buy equities at this point. At 5%, I would be seriously interested.
FWIW, paying cash or using a mortgage does not matter.
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Paying cash or using a mortgage matters if you cannot sustain a prolonged negative cash flow, but does not matter when considering yield. A net yield of 5% is something like 7% gross, which is pretty unheard of in this market..i.e. I would be seriously interested too!
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@ liebster - agree. Even 4% net is not something I have seen for a while. I've more or less stopped looking .
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I am seeing something like 3.5 - 3.8% Net - but have not factored in Voids.
If rents keep rising, it looks good, very good
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@ 3.8% net (excluding vacancies) I just might be interested given the building has recently been refurbished (and assuming a decent location). Did they do the pipes and exterior cladding at the same time as the lobby and elevators?
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by void do you mean vacancy? I normally deduct 5% of rental income for vacancy. dont forget rental income tax, management fee, rates, gov rent, and repairs. I typically give 2.5% rental income to repairs. Also don't forget any agency fees.
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Nope.
It looks pretty good to me..
Seeing more than one of these, but the best one is residential, so I cannot buy on my own, without paying a 15% BSD.
(I am hoping my partner wants to buy, and we can sort something out.)
Else I may pass it on to someone.
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I agree, L.
All those things matter, and should be factored in.
But on the initial broad-brush look, I am using :
The simplest measure: Gross Yield, less Management Fee.
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RATES are an important consideration in this...
(This per TI):
Some words of wisdom from our esteemed financial secretary: http://www.aastocks.com/en/News/HK6/61/NOW.525176.html
"Prospective home buyers should pay close attention to the trend of interest rates in the US, said Financial Secretary John Tsang. Hong Kong's property market will be under great influence once the US hikes rate, which probably comes in 2015, said Tsang, adding certain home owners will see their mortgage burden surge. Potential buyers must assess their affordability under normal interest rates, noted Tsang."
It begs the question, what are "normal" interest rates?
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ABOVE TODAY's RATES... maybe 4% or higher.
That's why I want to see some potential for Rent rises, to shield against the risk of higher interest rates.
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If it is 3.5-3.8% with only management fee taken into account, then I would assume that the true net yield on gross cost would be lower. If the yield is getting down to around 3.2%, I would rather buy a blue chip share (or several such shares).
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Remmy
11 yrs ago
Exactly, thats why I have been reccomending REITS. Based on my calculations HK property and REITS are right now at close to equilibrium levels when looking at total return based on typical leverage. So unless you have some good reasons to buy property (and their might well be some) I would urge you to consider REITS.
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You cannot live in a REIT.
And even if you buy a property as an investment, there is (probably) less "Basis Risk" to your own cost of renting.
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Remmy
11 yrs ago
You can live in a REIT as much as you can live in apartment. In fact a REIT gives you more flexibility in living options. Reason being is that you can use the regular dividend from the REIT to RENT a place of your choice. Further, RIETS are so broad, that there is really no risk bias when it comes to tenants, as the pool of properties in a REIT and the tenant mix is so broad there is probably a greater risk bias with you owning your own place (eg fire, collapse, you have a injury and can't work anymore to pay your rent, legal actions against the body corp, unexpected repairs, etc). By REITS I am referring to something like the LINK REIT which yields around 4% and which I expect contains properties in its portfolio that I expect will outperform residential property prices over the coming few years.
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As I've posted elsewhere (can't recall which thread but it was discussion on DB v Park Island), the rental yields for low rise properties in DB will be very attractive as:
i) DB has lagged rest of HK in property value appreciation in last 3 years
ii) new-to-hk expat families, who can't buy due to SSD, have to rent thereby pushing up rental demand for low rise properties (eg where mum/kids can't stand the thought of living in high rise apartments as they are not used to it)
Net result is that - if you can push the boat out in absolute HK$ terms - net yields (similar to gross as mgmt fee is small relative to rent) can easily reach 5%.
I do accept though its a bit of a niche market...
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HKLEV
11 yrs ago
Older buildings generally demand higher yields....they have higher maintenance cost and lower price gain probability. I have seen 4perc net yield, abt 4.5 perc gross in smaller sized 25-35 aged buildings in Sheung Wan in the last 6 months. However real sellers seem to be few and far between. Attractiveness depends on the location...in NT/TKO not attractive for reasons given before of i terest rates and increased supply. For a central/gentrifying/mtr llocation 3.8perc could be attractive.
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HKLEV
11 yrs ago
Remmy, I agree reits can also be interesting. my one concern vs owning property is lack of control as to what is put into the reit, at what price and how its leverage is managed, although this limited by hk regulations, so no excesses like in the us. Pricing is also not obvious for example the Link Reit trades well above nav, whereas the other hk reits all trade below nav.
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Decided not to wait, after the jump in the CCL - We bought yesterday
Net yield is now 3.5%, and should rise to 3.8% or higher, at a market rent. The expected interest rate is near 2.0% (for a 50% loan), so we expect to make 4.5% pa on our equity +/- capital appreciation, and that will beat keeping money in the bank.
The property was priced 4-5% under Bank Valuation.
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Remmy
11 yrs ago
HKLEV - regarding leverage, REITS probably have access to better financing than you do. Secondly, they have access to higher yielding assets that you do as what they buy is out of the price range of most individuals. They are also likely structured in a more tax effective way than an individual owner. Further, foreign money is not as restricted flowing into REITS as it is no into residential property. As for why the LINK REIT is trading above NAV, it likely because they are being conservative and "behind" in stating true asset values of their portfolio (not to mention the potential increase in yield as they modernize their assets and improve their tenant mix. Further, the Govt can do quite a lot to meddle with residential property (new taxes, new supply, buying/selling restrictions, max loan rations, etc) - not as much can be done with commerical property. The list goes on....
I have done the analysis, and I can tell you that x amount of money put into the LINK REIT this year (unleveraged) is likely to return close to if not more than that some amount of money with max leverage permitted into HK residential.
FYI - I am forecasting the LINK REIT share price to go from $40 now, to $50 by end of year (along with a 4% dividend yield), so that a yearly gain of around 24%, which is not to shabby at all :) Now compare that to the expected leveraged gain on residential property this year which I expect to be around 8%, with around a 3% yield, and then factor in transaction and borrowing costs. Its ends up being about even. Trust me I've done the analysis.
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I think the major benefit of holding REITS vs actual HK property is the liquidity.. No ESD/SSD to worry about or swallow.
@Remmy,
LINK REIT seems mostly invested into commercial properties and other stuff like that. The commercial market seems disjoint from residentials, do you think it'll react similarily in terms of speed and volatility?
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Remmy
11 yrs ago
Agree of course re liquidity, not to mention transaction costs. Again, once reason why in my analysis REITS come out very favourably.
The LINK reit has a range of commercial properties. These will have the same appreciation pressures that HK residential has, due to the US easing and the peg, so basically they will, indeed MUST, inflate as the US tries to reflate asset prices locally.
Further, the LINK REIT is poised to benefit nicely from any inflation in HK, as people flush with cheeply borrowed cash start spending more (both HKers and mainlanders), they will be able to move rents up.
I think these is a natural lag betwen commercial and residential, but you will see this year being the year commerial starts to catch up. Will likely be less volitile, as the Govt is much less likely to interfere with commercial property and the trading of shares that it is with residential.
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