Investors should take a fresh look at Tokyo’s office towers for their superior return yield over Hong Kong, where prices and borrowing costs eat into profits, said asset manager TH Real Estate.
“Tokyo can provide a strong equity yield. With an eye to the 2020 Olympics, infrastructure spending and rising tourism have also underpinned above-trend growth for a number of years. It is currently a principal city which attracts income-driven investors like us,” said Harry Tan, head of research, Asia-Pacific, at TH Real Estate.
“Hong Kong is a vibrant financial centre with a robust business environment. And over the long term, we would like to get exposure in the market. But it is not our key destination today,” said Tan.
Prime office buildings in Tokyo have a rental return yield of between 2.8 per cent to 3 per cent, said the UK-based real estate investment manager, with US$114 billion in assets under management across the world. But with low borrowing costs, cash-on-cash yield in Tokyo can reach 4 per cent.
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That is in part due to Japan’s monetary policy, leading to lower financing costs. Japan has adopted a negative interest rate since 2016. And in September, the Bank of Japan announced that the benchmark lending rate would stay at minus 0.1 per cent.
In comparison, Hong Kong’s rental yield for similar office buildings is 3 per cent. Despite having some of the world’s priciest addresses, Hong Kong’s return yield is lower than Tokyo’s because higher borrowing costs eat into the returns.
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“Borrowing costs [in Hong Kong] are close to 3 per cent. Therefore, for global institutional investors, there is not much income yield that we can derive from Hong Kong, which is more a capital-value driven market,” said Tan.
In recent months, the Hong Kong Monetary Authority has increased the base lending rate in line with raises by the US Federal Reserve.
This has prompted commercial banks to increase their lending rates for the first time in more than a decade. On September 27, HSBC became the first in Hong Kong to raise its prime rate.
With vacancy rates low and rents sky high in Hong Kong, TH Real Estate sees a risk for investors.
“The rent has been pushed up to a really high level. Meanwhile, the vacancy rate is relatively low. So even if companies are willing to pay the high rent to expand and to take up space, they are constrained,” Tan said.
Local observers also echoed the concern that Hong Kong will be at a disadvantage to attract global investors – at least in the short term.
“With our interest rate increasing, foreign investors will be more cautious,” said Vincent Cheung of Colliers International.