Posted inNews

Gaining yield in Asia-Pacific

As sources of yield remain hard to come by, Hong Kong property offers a high level of income that we feel is sustainable over the medium to long term.

Investors across the globe have spent the past couple of years searching for yield in an investment environment where the sources of that yield are rapidly diminishing.

To minimise volatility and uncertainty, investors are increasingly looking to expensive equities, high-quality fixed income, multi-asset or alternative propositions.

We have identified property in Hong Kong as one specific opportunity that surprisingly provides a high, and in our view sustainable, dividend yield while remaining attractive in terms of valuations.

Pitching the cost

Property in Hong Kong has looked overvalued for the past two or three years at least. It is expensive and we think prices should probably come off by 20% but, from a stockpicker’s point of view, there are plenty of reasons to see property companies as a positive investment.

Most people recognise that property prices should correct across residential, office and commercial space. But for us, many of these options have been priced-in so that some stocks are trading at huge discounts to NAV, which from a valuation perspective, means they are pretty attractive.

For example, we look at a property developer’s ability to generate dividends rather than simply short-term development profits, which will surprise those who only see them as businesses that build or develop properties to sell on.

We view them differently from the usual equity investor as we are interested in whether they can pay a sustainable dividend. We look at this more like an income stream – which has the potential to increase the yield over time.

Unlike other property developers, these companies have strong, cash-rich balance sheets and have become very good at building recurrent revenue streams. However, most are not just developers as they generate perhaps 30-40% of their income from office rental and retail space. The ones we like are increasing their recurrent revenue by developing the blocks they build in Hong Kong, the Philippines and China. They will build then sell the apartment blocks but keep some of the space themselves as a retail mall or serviced apartments, which is where they derive their recurrent income. In this scenario property prices do not have to go up for those property stocks to do well.

Big yield potential

What adds to their attraction is the current, almost extreme, search for yield? You can borrow money for virtually nothing. We are seeing big privatisations, share buybacks and so on, yet there are still stocks, such as Hopewell Holdings, New World Development and Sun Hung Kai Properties (SHKP) – all Hong Kong-based – currently throwing off a 4.5-5% yield. What would bond investors do for a crystallised 5% recurrent yield right now?

To illustrate this further, a Morgan Stanley research report (July 2016) expects SHKP’s underlying profit to grow 20% year on year by the end of 2016; dividends per share are expected to grow 10% year on year (implying a 45% pay-out ratio); and, residential sales are predicted to nearly triple.

While all these developers have projects on the go, New World Development has one that is due to complete in 2019, at which point its asset value could increase by 10% while its recurrent income could jump by 20%. It is not just a short-term opportunity either.

We have owned some of these stocks as part of our New Capital Asia Pacific Equity Income Fund since close to launch more than five years ago.

Interest rate risk?

Looking elsewhere, it is not just the property developers seeing the value in Asian property, with insurance companies across mainland China among those also buying up office towers. They are prepared to pay more because what they are really buying is the yield that bricks and mortar provides. The obvious danger is rising interest rates but any significant rise seems unlikely in the current environment.

In a world where sustainable income is increasingly difficult to find while investors’ demand for yield is on the rise, Hong Kong property appears to offer plenty of opportunities to satisfy both.


This document does not constitute and shall not be construed as a prospectus, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation, tax situation or particular needs of the recipient. You should seek your own professional advice (including tax advice) suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

This document contains material that may be interpreted in the country in which this document has been communicated as a financial promotion and/or advertisement in relation to investment services, securities or other investments. Accordingly, the information

in this document is only intended to be viewed by persons who fall outside the scope of any law that seeks to regulate financial promotions and/or advertisements in the country of your residence or in the country in which this document has been communicated. If you are uncertain about your position under the laws of the country in which this document has been communicated then you should seek clarification by obtaining legal advice.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information and/or investment research may be inaccurate, incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position

of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.

The value of investments and the income derived from them can fall as well as rise, and any reference to past performance is no indicator of current or future performance. Any past performance data for collective investment schemes may not take account

of the commissions and costs incurred on the issue and redemption of shares. Income from an investment may fluctuate. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested. The risk of loss from investing in commodity and financial futures, foreign exchange contract securities, warrants and index contracts and options can be substantial.

The publication or availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. No distribution of this information to anyone other than the designated recipient is intended or authorized. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

The information contained in this document is merely a brief summary of key aspects of the New Capital UCITS Fund plc (the “Fund”). More complete information on the Fund can be found in the prospectus or key investor information document, and the most recent audited annual report and the most recent semi-annual report. These documents constitute the sole binding basis for the purchase of Fund units. Copies of these

documents are available free of charge and may be obtained at the registered office of the Fund at 5 George’s Dock, IFSC, Dublin 1, Ireland; in the United Kingdom from the facilities agent EFG Asset Management (UK) Limited (“EFGAM”), Leconfield House, Curzon Street, London W1J 5JB, United Kingdom; in Germany from the German information agent, HSBC Trinkaus & Burkhardt AG, Königsallee 21/23, 40212 Düsseldorf, Germany; in France from the French centralizing agent, Societe Generale, 29, boulevard Haussmann – 75009 Paris, France; in Luxembourg from the Luxembourg paying agent, HSBC Securities Services (Luxembourg) S.A., 16 boulevard d’Avranches, L-1160 Luxembourg, R.C.S. Luxembourg, B28531; in Austria from the Austrian paying and information agent, Erste Bank der oesterreichischen Sparkasse AG Graben 21, 1010 Vienna, Austria; in Sweden from the Swedish paying agent, MFEX Mutual Funds Exchange AB, Linnégatan 9-11, 11 447 Stockholm,

Sweden; and in Switzerland from the Swiss representative, CACEIS (Switzerland) SA, Route de Signy 35, CH-1260 Nyon and the paying agent, EFG Bank AG, Bleicherweg 8, 8022 Zurich.

Hong Kong: This document does not constitute an offer, solicitation or invitation, publicity or any other advice or recommendation. The information contained within this document has been obtained from sources believed to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. Investment involves risk. Past performance is not indicative of future results. Before making any investment decision to invest in the Fund, you should read the Hong Kong offering documents and especially the risk factors therein. An investment in the Fund may not be suitable for everyone. If you are in any doubt about the contents of this document, you should consult your stockbroker, bank manager, solicitor, accountant or other financial adviser for independent professional advice. This document is issued by EFG Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission (“SFC”) in Hong Kong. The SFC takes no responsibility for the contents of this statement and makes no representation as to its accuracy or completeness.

Singapore: The Fund is not authorised or recognised by the Monetary Authority of Singapore (the “MAS”) and the shares in the Fund (the “Shares”) are not allowed to be offered to the Singapore retail public. Moreover, this presentation, and any other document or material issued in connection with the offer or sale is not a prospectus as defined in the Securities and Futures Act, Chapter 289 of Singapore (“SFA”).

Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. You should consider carefully whether the investment is suitable for you.

This presentation has not been registered as a prospectus by the MAS, and the offer of the Shares is made pursuant to the exemptions under Sections 304 and 305 of the SFA. Accordingly, the Shares may not be offered or sold, nor may the Shares be the subject of an invitation for subscription or purchase, nor may this presentation or any other document or material in connection with the offer or sale, or invitation for subscription or purchase of the Shares be circulated or distributed, whether directly or indirectly, to any person in Singapore other than under

exemptions provided in the SFA for offers made (a) to an institutional investor (as defined in Section 4A of the SFA) pursuant to Section 304 of the SFA, (b) to a relevant person (as defined in Section 305(5) of the SFA), or any person pursuant to an offer referred to in Section 305(2) of the SFA, and in accordance with the conditions specified in Section 305 of the SFA or (c) otherwise pursuant to, and in accordance with, the conditions of any other applicable provision of the SFA.

Where the Shares are acquired by persons who are relevant persons specified in Section 305A of the SFA, namely:

a)      a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

b)      a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor.

The shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Shares pursuant to an offer made under Section 305 of the SFA except:

  1. to an institutional investor or to a relevant person as defined in Section 305(5) of the SFA, or which arises from an offer referred to in Section 275(1A) of the SFA (in the case of that corporation) or Section 305A(3)(i)(B) of the SFA (in the case of that trust);
  2. where no consideration is or will be given for the transfer;
  3. where the transfer is by operation of law;
  4. as specified in Section 305A(5) of the SFA; or
  5. as specified in Regulation 36 of the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 of Singapore.

The offer, holding and subsequent transfer of Shares are subject to restrictions and conditions under the SFA. You should consider carefully whether you are permitted (under the SFA and any laws or regulations applicable to you) to make an investment in the Shares and whether any such investment is suitable for you and you should consult your legal or professional advisor if in doubt.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Leconfield House, Curzon Street, London W1J 5JB, United Kingdom, telephone +44 (0)20 7491 9111.

Part of the Mark Allen Group.