20180928-高盛-Prime_rate_hiked__focus_now_on_transaction_volume_9页_708kb

Summary of Hong Kong Real Estate: Residential Report

Core Content

This report discusses the impact of rising interest rates on the Hong Kong real estate sector, particularly focusing on residential properties. It highlights the recent increase in prime lending rates and its implications on mortgage rates, property affordability, and sector valuation.

Key Points

Interest Rate Hike and Its Implications

• Prime Rate Hike: Key Hong Kong banks raised their prime lending rates and HKD saving rates by 12.5bps on September 27, marking the first increase since 2006.
• Expected Further Hikes: Economists anticipate 4 US Fed Fund rate hikes in 2018 and 4 in 2019, leading to a terminal rate of $3.25 - 3.5%$.
• Mortgage Rate Adjustment: The move was anticipated, as the team noted in August 2018 that a higher base rate would likely follow the mortgage spread adjustment.
• NIM Increase: The team revised up net interest margins (NIMs) for banks due to higher interest rate estimates (c.10bps higher than previous forecasts).

Property Affordability and Cash Flow

• Debt-Service Ratio (DSR): A 160bps increase in mortgage rates would require a c.15% property price adjustment to restore DSR to current levels.
• Affordability Metrics: The average private residential unit has a DSR of 77% and a price-to-income ratio of 17X.
• Negative Cash Flow: Effective monthly cash flow for property investors turned negative in 3Q18, at -c.HK$700/month, below the historical median of -c.HK$550/month.

Sector Valuation and Investment Outlook

• Valuation Retracted: The Hong Kong real estate sector has retreated to -1SD levels, with an average discount-to-NAV of 47%, higher than the post-QE average of 39%.
• Transaction Volume: The key metric to watch is secondary transaction volume. If it does not improve, the NAV discount is expected to remain wide.
• Investment Recommendations:
  • Buy: SHKP, Wharf REIC, Hongkong Land, Swire Prop.
  • Neutral: CK Asset, Hang Lung Prop., Kerry Prop., Link REIT, New World Dev., Hysan, Henderson Land.
  • Sell: Henderson Land.

Supporting Exhibits

• Exhibit 1: HK banks' interest rate forecasts indicate a catch-up to US rates.
• Exhibit 2: Residential rental yield spread shows a c.20bp negative yield.
• Exhibit 3: Monthly cash flow has turned negative.
• Exhibit 4: DSR and price-to-income ratio for private residential units.
• Exhibit 5: Sensitivity analysis showing a c.15% price decline needed for a c.160bps rate hike.
• Exhibit 6: Property prices rose 13% in 2018 YTD.
• Exhibit 7: Secondary market transaction volume at 3-year low.
• Exhibit 8: PropCos (ex-REIT) 5-yr NAV discount chart.
• Exhibit 9: HK Property Sector Relative Performance.

Investment Considerations

• Policy Headwinds: Recent government measures and rising rates are directional negatives for developers.
• Preferred Sectors: Retail landlords and office landlords are preferred due to potential recovery in retail sales and stable demand.
• M&A Rank: Companies are ranked on M&A probability (1 to 3), with higher ranks indicating greater acquisition likelihood.
• Quantum Database: A proprietary tool for financial statement analysis and company comparisons.
• GS SUSTAIN Strategy: Focuses on long-term alpha generation through identifying high-quality industry leaders.

Regulatory and Disclosure Information

• Analyst Certifications: Justin Kwok, CFA, certifies the report reflects his personal views.
• GS Factor Profile: Compares key attributes (Growth, Financial Returns, Multiple, Integrated) of stocks to market and sector peers.
• Coverage Groups: Lists primary analysts and their respective coverage areas.
• Rating Distribution: Buy (35%), Hold (53%), Sell (12%) globally.
• Investment Banking Relationships: Reflects the percentage of rated companies with which Goldman Sachs has provided investment banking services in the last 12 months.
• Regional Disclosures: Includes information on regulatory requirements in various jurisdictions such as Australia, Brazil, Canada, Hong Kong, India, Japan, Korea, New Zealand, Russia, Singapore, Taiwan, UK, and EU.

Conclusion

The report underscores the impact of rising interest rates on the Hong Kong real estate market, emphasizing the need for property price adjustments to maintain affordability. It recommends a focus on retail and office landlords, while cautioning against developers due to policy and rate-related risks. The valuation metrics and sensitivity analysis provide a framework for assessing the sector's current and future performance.