The Hong Kong economy has been hard hit by political unrest and the ongoing trade war between China and U.S. since 2019. The two incidents pushed its economy into a technical recession in 2020. Then came COVID-19. Hong Kong businesses, especially in the retail sector, suffered another big blow as tourists dried up overnight. The experts now forecast that the pandemic will send Grade A office rents down by 11% to 16% in 2021.
With all the doom and gloom, it seems that the future is bleak for commercial properties in Hong Kong. REITs with heavy exposure in Hong Kong have taken a beating since 2019. But are Hong Kong REITs still a profitable long-term investment despite recent performance?
Just like what we did with the calculation of investment returns for S-REITs and M-REITs since their IPOs, we are going to do the same for Hong Kong REITs that have been listed for at least 10 years and evaluate their long-term performance.
Once again, we assume that David (a fictional character) invests HK$10,000 in each Hong Kong REIT from the day it listed. Since David is a hard-core income investor, he doesn’t want to come out with extra money to subscribe to any rights and is prepared for any share dilution. Let’s also assume that he neglects to sell his nil-paid rights from which he can make a profit from.
For example, if David invested in Fortune REIT since its IPO, his initial investment of HK$10,000 would’ve grown to HK$15,100 (+51% in capital gains) by 15 February 2021. If we include the dividends he’s received over the years, David would have made even more in Prosperity REIT as his initial investment of HK$10,000 would have grown to HK$29,300 (+193% in capital gains and dividends). Overall, his total annualised return in Prosperity REIT from 2003 to 2021 is 6.2%. (Note: We’ve excluded brokerage costs, currency exchange gains/losses and taxes that might be applicable to foreign investors.)
If David invested HK$100,000, then his investment would’ve grown to HK$293,000. Basically, the more money he invests, the more he makes. And the longer he holds, the more dividends he’s going to receive. So after investing for more than ten years, here are the top three best-performing Hong Kong REITs for David.
3. Fortune REIT (Annualised return: 6.16%)
Since 2003, every HK$10,000 investment in Fortune REIT would’ve turned into HK$15,100. Including dividends, every HK$10,000 would cumulatively become HK$29,300.
2. Sunlight REIT (Annualised return: 6.85%)
Since 2006, every HK$10,000 investment in Sunlight REIT would’ve turned into HK$15,000. Including dividends, every HK$10,000 would cumulatively become HK$27,000.
1. Link REIT (Annualised return: 14.66%)
And the most prosperous REIT in Hong Kong is not Prosperity REIT but… Link REIT. Since 2005, every HK$10,000 investment in Link REIT would’ve turned into HK$65,300. Including dividends, every HK$10,000 invested would cumulatively become HK$89,300!
In summary, here is David’s overall performance:
Similar to many Singapore and Malaysian REITs, Hong Kong REITs have also delivered decent annualised returns except for Hui Xian. David didn’t need come up with any additional capital to subscribe to any right issues; the table above is his actual score.
His investment loss in Hui Xian can be easily offset from the gains of his other REIT investments. However, if he had subscribed to their rights (if any), he would have made more money since rights are usually sold at a discount. Most importantly, David continues to receive regular quarterly dividends from his investments in Hong Kong REITs rain or shine.
As you can see, REITs remain a great option for anyone who wants to build a steady and consistent stream of passive income. However, please note that you should not buy or avoid a REIT just based on the data above as past performance is not necessarily indicative of future results. It’s highly important to have a proper investment process to help you identify and invest in the right REITs that will give you a steady stream of passive income and capital gains down the road.
