20141103-法国巴黎银行-HONG_KONG_DEVELOPERS_Mid-end_new_launches_still_shine_43页_815kb

Mid-end New Launches Still Shine

Core Content Summary

This report provides an analysis of the Hong Kong residential real estate market and highlights investment recommendations for developers in the mid-end segment. It outlines the effects of the Special Stamp Duty (SSD), rental trends, and the impact of the Occupy Central protests on the market.

Key Market Trends

• Primary Market Performance:

  • The primary residential market has shown strong performance, with sales volumes expected to increase by 12% to 16,000 units in 2014, setting a record for total transaction value at HKD170 billion, a 84% year-on-year increase.
  • The primary volume is expected to remain stable in 2015.

• Secondary Market Impact:

  • Secondary units from the 10 major residential estates available for sale fell by 29% YTD in 2014, reaching a record low.
  • This decline has supported a 8.7% property price increase YTD.
  • The SSD has been extended from 24 months to 36 months, which will increase the number of frozen secondary units by 58% from 104,000 in Nov-14 to 164,000 in Nov-15, or 14% of the total private residential units.

• SSD Effects:

  • The stronger SSD will limit the availability of secondary units and benefit mid-end primary launches.
  • High SSD rates are expected to offset potential gains from property sales, making secondary market transactions less attractive.

• Rental Trends:

  • Mid-end and mass segment rentals continue to rise, with a 9.6% YTD increase.
  • A record-low vacancy rate supports rental growth, encouraging end users to buy rather than rent.
  • Annual rental growth is expected to remain at 5% in 2015, even with a potential mortgage rate hike of less than 50bps.

Investment Recommendations

• Recommended Developers:

  • BUY: Wheelock, Sino Land, Cheung Kong, SHKP
  • HOLD: Kerry Properties, New World Development, Henderson Land

• Reasons for Recommendation:

  • Developers with a higher proportion of saleable resources and average unit prices below HKD10 million, such as Wheelock, Cheung Kong, SHKP, and Sino Land, are expected to benefit from high sell-through rates in the mid-end segment.
  • Developers with low gearing, like Sino Land and Cheung Kong, are favored for potential NAV-accretive acquisitions from MTRC and URA at reasonable prices.
  • Wheelock is the top pick due to its highest earnings growth potential in FY15-16 and lowest P/E and P/B valuations.

Valuation Comparison (FY15E)

Key Insights

• Buy vs. Rent Decision:

  • For mid-end and mass residential units, the gap between mortgage payments and rentals is narrowing, making buying more attractive.
  • Even with a 50bps mortgage rate increase, rental growth is expected to offset the impact, keeping the buy vs. rent decision in favor of purchase.

• Market Liquidity:

  • Ample liquidity in Hong Kong has enabled banks to offer aggressive Hibor-based mortgage plans with rates below 2%.
  • The loan-to-deposit ratio has dropped, supporting lower mortgage rates.

• Supply and Demand:

  • Annual private housing supply is expected to remain at about 15,000 units over 2014-18, matching fundamental demand.
  • The Development Bureau's supply forecasts have historically been overestimated, and actual completion rates have lagged behind projections.

• Subsidized Housing:

  • Subsidized housing supply is limited, with only 2,160 units available for application in late 2014, and completion expected in 1Q17.
  • These units are likely to be allocated to public housing tenants (60%) and private housing tenants (40%).

Conclusion

The Hong Kong residential market is expected to remain positive in 2015, driven by strong fundamental demand and the continued impact of SSD on the secondary market. Mid-end primary launches are expected to benefit from the reduced supply of secondary units and the overall trend of rental growth. Developers with a strong mid-end presence and low gearing are recommended for investment.