Hong Kong-based Chow Tai Fook Enterprises (CTFE) is increasing its risk appetite in real estate and private equity as it bets on inflation peaking and China reopening in 2023.
With real estate investment one of its core strategies, CTFE, the investment arm of the Cheng family in Hong Kong, is particularly bullish on the hospitality sector globally, according to Managing Principal Kenneth Lau.
He said there had been a V-shape rebound of hospitality real estate ever since Covid-19 restrictions were lifted in most parts of the world over the past 12 months.
“The rebound we’ve seen – this so-called revenge travel trend – is really quite remarkable,” Lau told the Asia Private Equity Forum 2023 in Hong Kong on January 13, referring to the phenomenon that people are travelling to make up for lost time during the pandemic.
CTFE's portfolio has quite a bit of exposure to hospitality globally. They were seeing room rates as well as occupancy rates 40-50% higher than in 2019, Lau noted.
“This revenge travel is going to stay. Some may have concerns about the pending recession, but in my conversation with all the operators within the sector, they're all still extremely bullish.”
Lau said he believed there would be a shift from business travel to leisure travel in 2023, noting that the remote collaboration style people had become accustomed to during the pandemic could remain for longer, ultimately depressing business travel for longer.
He said his team was currenlty putting a lot of resources into getting a handle on the latest travel trends. What was emerging was a trend where people were staying longer and focusing on local experiences rather than engaging in quick city tours.
“We do believe that despite a recession, which will hurt people’s spending, people will still want to travel,” Lau said.
With the mainland China-Hong Kong border reopening on January 8, Lau believes the city’s retail real estate will recover. He added that Hong Kong’s most recent talent incentive scheme would have a “huge impact” on Hong Kong’s economic growth and further stimulate the retail sector.
At the end of 2022, the Hong Kong government rolled out a series of favourable talent schemes that grant visas to eligible overseas and mainland Chinese professionals to reside in Hong Kong for up to two years without employer sponsorship.
CHINA PROPERTY RECOVERY
In terms of mainland China, Lau said he believed the high-yield bond market had been “dismantled” after China’s crackdown in the property sector.
“The growth of the whole industry in China, particularly on the residential side, is going to slow down. But that's helpful because obviously demand is a bit depressed at the moment,” he said.
The family office, however, is “cautiously optimistic” that there would be a recovery going forward after the government launched rescue plans by allowing bank credit, bond issuance, and equity financing.
As China’s economic activities normalise, residents' demand for home buying would gradually recover as there were still limited investment options onshore, Lau noted.
JPMorgan Chase & Co estimates that over the past three years, excess savings of Chinese residents reached 5.6 trillion yuan ($835.5 billion).
PRIVATE EQUITY EXPOSURE
In terms of overall asset allocation, Lau said the firm was cautiously increasing exposure to private equity in the near term.
Private equity is still only a small part of the family office’s portfolio. Even if there are outstanding capital commitments that could contract liquidity, in a good year, good vintage should generate good returns, he said.
In public markets, Lau thought Chinese equities would stand out in 2023.
Its tactical position is likely to focus on pent-up demand in the consumption sector unleashed by China’s reopening, together with government support policies, including those in the property sector.
Over the long term, the family office is set to make strategic allocations in Chinese equities around themes that include commodities and food and energy security.
The decoupling of global supply chains and the push for carbon neutrality would create a “huge demand” for commodities, to manufacture electric vehicle, for example, he noted.
Food, water and energy security arising from suppy chain disruptions was something the family office would looking at over the long term, he added.