Hong Kong's REIT sector faces sharp valuation decline

Meanwhile, its average leverage ratio rose to 30.2% in 2023 from 27.8% in 2022.

Hong Kong's REIT market value last year fell 13% year-on-year (YoY), mainly due to a decline in valuations, according to a report by Cushman & Wakefield. Regionally, the Asia REIT market value was US$252.1b, slipping 7% YoY.

The economy's share in the region's sum amounted to 8.3%, albeit smaller than Singapore (30.1%) and Japan (43.4%).

In terms of the average leverage ratio, it stood at 30.2% in 2023 from 27.8% in 2022, with a median of 25.3%, with Regal Real Estate Trust and Yuexiu Property Trust having a leverage ratio greater than 40%. Spring REIT showed the steepest rise in leverage ratio in 2023, climbing by 8% from the previous year to 37.6%.

By property type, the hotel REIT market had the highest average leverage ratio at 43%, followed by industrial/logistics at 34%, with the lowest being offices at 26%.

In 2022, the Hong Kong authorities followed the US rate hike cycle, whereas the Chinese mainland could implement a quantitative easing monetary policy, resulting in lower RMB interest rates. In response, several REITs implemented interest rate hedging plans to reduce their financing costs and risks from interest rate movements. 

The report added that the rise in the Hong Kong dividend yield is related to REIT operations and to secondary market prices. The Hang Seng REIT index fell more than 20% in 2023, falling below 3,000 points for the first time at the end of October, with a fall in stock prices driving a significant increase in the average dividend yield.

The bond interest rate market trend was similar to Singapore's in 2023, characterised by an initial rise followed by a fall. The average 10-year government bond rate in 2023 was at 3.7%, with the spread between REIT market dividend yields and the average 10-year government bond rate reaching 4.8%.

Hong Kong’s REIT market has long been discounted, but a softening in 2023 saw the average price-to-book (P/B) ratio continue to slip, with an average P/B ratio of 0.91.

However, as of 31 December 2023, the average P/B ratio was at just 0.36. Hence, REITs are now being traded on the secondary market at just 36% of their book net asset value, further declining from 45% in 2022.