Excerpts from report published on 16 October by Terence Wong, CFA, head of research at OSK-DMG.
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I NEVER KNEW bak kwa was so hot in Hong Kong. Business must have been so good for Bee Cheng Hiang, the Singapore-based maker of Chinese pork jerky, that it was able to renew its rental in its Causeway Bay outlet at a HK record of HK$3,600 psf, almost treble what it was paying previously.
The monthly rental of HK$1.1 m can probably get you a decently-located shop in most places in the region. I figure Bee Cheng Hiang would have to sell 10,000 packets of bak kwa a month just to cover the rental.
But this is not a unique case. CEO Richard Eu of Eu Yan Sang, the largest traditional Chinese medicine retailer in HK and Singapore, recently lamented that he had to give up two of his stores in HK’s Central District due to spiralling rentals. Even his cordiceps don’t rise as quickly.
Not too far away, Swedish fashion retailer H&M also grudgingly moved out of its flagship store after rentals doubled.
The gravity-defying rentals are not confined to the upmarket Central-Causeway Bay area. Even in the less glam Mongkok in Tsimshatsui, renown dim sum specialist Tim Ho Wan (the cheapest Michelin star restaurant with one of the yummiest char siew buns) is forced to shit out of its hole-in-the-wall joint as rentals are set to surge by 2.5 times.
While retailers and consumers cry foul, landlords are naturally pumping their fists. There are a couple of them which the OSK team in HK covers that are worht highlight – Soundwill (BUY, TP HK$18.04) and CSI Properties (BUY, TP HK$0.50).
Singapore landlords -- my picks
Other than HK, Singapore has seen a lift in rentals, though no where as impressive. Capital values for the commercial sector posted strong growth in 3Q12 as cooling measures in the residential sector diverted funds to the commercial and industrial real estate markets.
In a recent report, DTZ highlighted that the average capital value of retail units in the prime Orchard/Scotts Road area rose 5.7% q-o-q in 3Q12 while prices of suburban retail space went up 3.6%.
Supported by low interest rates and abundant liquidity, interest in strata-titled commercial units remained high, leading to compression in rental yields.
Second Chance Properties, one of the largest owners of suburban retail space, received offers for its retial space at Jurong East and Toa Payoh that were 30-40% above valuation. At the offer price, the net yield would have worked out to only 4%. Naturally, the enterprising CEO Mohamed Salleh selectively took advantage of the offers to unlock some of the value for his properties.
Which are the stocks best-positioned to benefit from the investment interest in strata-titled commercial space? For starters, look no further than Second Chance Properties (BUY, TP S$0.53). This company owns a portfolio of well-located retail units, valued at $158 m, across the island, providing it with steady rental income and capital appreciation potential.
Beyond properties, Second Chance also runs a profitable gold retailing business and a chain of apparel stores catering to the Malay market under the First Lady brnd. The stock recently attracted Fidelity as a substantial shareholder and continues to offer an attractive yield of 8%.
Another company that could benefit is Superbowl (Unrated). Its investment properties portfolio include units in Parklane Shopping Mall amounting to 20% of strata area, and retail units in Orchard Plaza, Orchard Towers, Bukit Timah Plaza and Balestier Point, and are carried at cost in the balance sheet.
Superbowl also owns a 50% stake in the Zhongshan Park commercial development comprising hotels, offices and retail space jointly with sister company Hiap Hoe (BUY, TP S$0.68).
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