How to Buy the World's Most Valuable Real Estate at a Massive Discount

Editor's note: Are you investing in real estate yet?

As you'll learn in today's Masters Series essay – adapted from a 2016 special report for True Wealth subscribers – it's not too late.

In it, Steve Sjuggerud shares what he learned about Hong Kong real estate from a conversation with Asian real estate guru Peter Churchouse... the big winners from the Asian housing boom... and one exchange-traded fund you can buy to start profiting from this trend immediately...

How to Buy the World's Most Valuable Real Estate at a Massive Discount
By Steve Sjuggerud, editor, True Wealth

"These are some of the best values I have ever seen in property companies," Peter Churchouse told me as we sailed out of the Hong Kong harbor on the Moonblue 2, his racing yacht.

Peter should know...

He moved to Hong Kong in 1980. He built his wealth and his reputation on Asian investing. Along the way, he ran Morgan Stanley's Asia Research department for years – at the height of Morgan Stanley's success in the area.

These days, he writes The Churchouse Letter, an outstanding investing letter written from his perspective on the other side of the globe. He's also a frequent guest on the financial TV channels here in the U.S. I'm proud to call him my friend.

As we rounded the corner toward the island of Po Toi, Peter was shaking his head...

"If you look at the top China property companies, you will find a few where the price-to-earnings ratio is LOWER than the dividend yield," he told me. "I don't remember ever seeing that before."

Yes, that's right – the dividend yield is HIGHER than the price-to-earnings (P/E) ratio.

That is crazy...

For reference, the dividend yields on U.S. blue chips like Microsoft (MSFT) and Johnson & Johnson (JNJ) are less than 3%. And the forward P/E ratios on MSFT and JNJ are more than 15.

For those two numbers to cross, these stocks would have to fall – a lot!

Meanwhile, many Chinese property developers (most of which trade in Hong Kong) are paying dividends of 4% or more and are selling for single-digit P/E ratios. That's crazy. These aren't tiny businesses we're talking about here... Many of them are large and powerful.

One critical thing we learned on the ground in China is how important property is to the Chinese people...

They don't trust the stock market today. They don't buy bonds. And they don't want to hold a lot of money in the bank.

The big goal is to own property – as much property as possible. It's their primary store of wealth.

The homeownership rate in China is close to 90% – one of the highest in the world. And 80% of homeowners own their homes outright – no debt. The typical down payment is 30% for the first property and 50% for the second. In short, a housing-debt crisis like we saw in the U.S. is not likely to happen in China.

The property gains in China's major cities have been truly remarkable. Peter said...

This is a raging bull market in property. Certainly in the major cities, prices are up.

In Shenzhen, across the border from Hong Kong, average residential prices in 2015 were up 57%. In Shanghai, they were up 25%-26%, and in Beijing, close to 20% over the same period.

China's property market is booming. Demand is high. Who should be the big winner in this situation?

The simplest answer is the property developers... the folks who are actually building the new, in-demand properties and selling them at these higher prices.

Chinese property companies trading in Hong Kong are dirt-cheap, and they have just broken out into a strong uptrend. It's time for us to buy.

Fortunately, we have a simple way to do that here in the U.S. We can buy a basket of Hong Kong-listed property developers with a single click through the Guggenheim China Real Estate Fund (TAO).

TAO holds a basket of property companies that operate in Hong Kong and China. And like Peter said, these stocks are a fantastic value right now. History proves it...

The chart below shows the price-to-book (P/B) ratio for the Hang Seng Properties Index (HSP), which TAO mirrors. Take a look...


The entire HSP Index trades for a 10% discount to book value, as I write. That's near the all-time low we saw in 2016, as the chart shows. It has been this cheap only three times in the past, and it soared in all three instances...

• In 1998, the HSP Index bottomed at a P/B ratio of 0.54. The index then soared 171% over the next 16 months.

• We saw two other valuation bottoms in 2003 and 2008... The HSP Index jumped 83% in just 11 months and 76% in eight months, respectively, after those instances.

The valuation bottom we saw in January 2016 was the lowest we've seen since 1998. The HSP Index increased 79% since bottoming in January 2016. But you haven't missed it!

I believe that dirt-cheap prices and big dividend yields will cause investors to move into these stocks. There's still plenty of upside left in these Hong Kong-listed property companies.

Importantly, it has already started. TAO has been quietly trending higher for the past few years.

This is a perfect setup...

An investment legend and expert in the field – and one of my heroes – sees values he never thought were possible. I agree with him that today's values make this a no-brainer opportunity.

In addition, we're finally seeing a breakout in these stocks. Shares of TAO have gone nowhere for years. But they're breaking out right now. And that gives us a safe opportunity to buy.

This is what we want. Now is the time to make this trade.

Good investing,

Steve Sjuggerud

Editor's note: Steve's friend Peter Churchouse recently wrote down all of his wealth-building secrets. This could be the most important book you read on investing all year. But it isn't available on Amazon or in bookstores. In fact, the only way to get your hands on a hard copy is by clicking here.