In property-obsessed Hong Kong, why don’t real-estate mutual funds play a bigger role?
The AUM in Hong Kong-domiciled property mutual funds was $54.3m at the end of October, according to data from Morningstar. It is a tiny drop (0.01%) in the ocean of global property mutual funds, which has total AUM of $522bn and is dominated by US-domiciled funds.
Even compared to other Asian countries, Hong Kong-domiciled property mutual funds seem insignificant, dwarfed by those of Japan ($65.6bn), Thailand ($1.32bn), Taiwan ($449.4m), Malaysia ($183.gm) and Singapore ($170.8m).
The reasons are three-fold, according to Mark Laidlaw, senior analyst of Asia manager research, and Wing Chan, director of manager research at Morningstar. The first is the investors’ preference for brick-and-mortar, especially for residential properties. Although hard numbers are difficult to come by, anecdotal wisdom is that Hong Kong investors traditionally like holding property directly rather than through collective investment vehicles, Chan observed.
Secondly, investors interested in commercial and office real estate have an option to invest directly in real estate investment trusts (REITs) which trade on the Hong Kong Exchange. The market cap of the 11 REITs trading on the Hong Kong Exchange was $34.7bn, as per data from the exchange. The largest two, the Link REIT, specialising in the retail sector and the Champion REIT (office and commercial sector) have market caps of $19.5bn and $4.3bn, respectively.
The third reason is more a factor of the territory’s mutual fund landscape rather than of the property sector. Most mutual funds available in Hong Kong are Europe-domiciled Ucits products. Of the 34 SFC-authorised funds included by FE in the property sector, only four are domiciled in Hong Kong.
Another and perhaps the foremost reason may be that investing in property mutual funds does not appeal to Hong Kong’s risk-taking real estate investors. A mutual fund is not likely to deliver higher returns than buying a residential property or investing in shares of a REIT in Hong Kong.
Over the three years ending 30 September 2017, prices of residential properties in Hong Kong have gone up by 27.7%, as measured by the price index for private domestic properties published by Hong Kong’s Rating and Valuation Department (RVD). The index does not include rental yield, which could add around 2.5% per year or more, according to RVD’s data.
Only two mutual funds, the Hang Seng Property Sector Flexipower Fund and the Henderson Horizon Pan European Property Equities Fund, delivered higher returns, 44.7% and 31.5%, respectively, in the same period. The sector average was only 17%. An investment in shares of the Link REIT would have brought a 50% return, and in the Champion REIT a 66% return in those three years.
Three-year performance of the two top property funds vs category average and the share price of the Link REIT
