Thursday, July 15, 2010

A potential opportunity

Hong Kong real estate is our largest asset class (by a considerable margin). All but one of those Hong Kong properties is residential. The one exception is a retail shop in a suburban area which is leased to a multinational. The retail shop is one of two shops in the ground floor of a residential apartment building (which is fairly common in Hong Kong). So far, it has been an excellent investment both in terms of capital appreciation and in providing a steady cash flow.

The other retail shop in the building is now for sale with vacant possession. As a stand alone investment the asking price is probably in line with recent sales in comparable properties as is the projected 3.5% net yield on gross cost. (I've found it harder to get comparable rental data so do not know whether the projected rental is a realistic assessment or not and have discounted the agent's projection by 10%.) From an investment perspective, this is not exciting.

The first interesting aspect is that we already own the adjoining shop in the same building. This gives us the option (when both shops are vacant) of combining the two properties for a single tenant or continuing to rent them separately. While that flexibility has its attractions, in that neighbourhood it is difficult to see anything other than a restaurant or a bank branch needing the bigger space. Accordingly, I attach no value to the possibility of combining the two properties (unlike the real estate agent).

The second interesting aspect is that the asking price and the projected rent give us something to benchmark or existing property against. All I can say is that I am really looking forward to the lease coming up for renewal next year.

I've concluded that it's the wrong property for us as it concentrates risk and won't be putting an offer in. That said, I would prefer that (absent a very compelling valuation) future additions to the portfolio be outside the residential sector.

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