20160629-高盛-Hong_Kong__Real_Estate__Don_t_read_too_much_in_volume_pick_up_amid_skew_to_small-ticket_units_and_uncertain_macro_22页_577kb

Hong Kong Real Estate Market Summary

Core Content

The Hong Kong real estate market is experiencing a gradual recovery in transaction volumes, but the overall market remains in a slow correction phase. The analysis highlights several key trends and factors influencing the market, including macroeconomic uncertainty, developer financing strategies, and the potential for political events to affect housing policies.

Main Points

• Transaction Volume Recovery:

  • April and May 2016 saw a 136% increase in residential transaction volume compared to the first quarter of 2016, which was a 15-year low.
  • The average monthly volume was 4,526 units, still down 1% year-on-year and 36% from the 20-year average of 7,100 units.
  • Seasonality and developer financing incentives contributed to the rebound, but the market remains weak overall.

• Price Correction Slowdown:

  • The pace of price correction has slowed, with secondary residential prices down 4.9% YTD as of June 12, 2016.
  • The market is now 11.9% below its Sep 2015 peak, indicating a plateau in price declines.
  • This slowdown is attributed to market expectations of a slower rate hike path by the Fed, with only one expected in 2016 instead of two.

• Market Bifurcation:

  • The market is expected to continue bifurcating, with activity concentrated in the low-end (under HK$5mn) and ultra-high-end (above HK$20mn) segments.
  • This is due to tightened LTV and DSR caps, which have reduced the pool of eligible buyers for mid-range properties, and the continued demand from high-net-worth individuals and foreign investors for premium assets.

• Developer Financing Incentives:

  • Developers are offering higher LTV financing options to stimulate demand, such as CKP's 123% LTV for some units and SHKP's 120% LTV for others.
  • These loans are typically short-term and may serve as bridging loans, with buyers expected to return to traditional banks for long-term mortgages.

• Valuation:

  • The sector is trading at the low end of its historical P/NAV and P/B ranges.
  • Companies like CKP, Swire Prop, and HLP are rated as "Buy," while others like Hysan and Champion REIT are rated "Sell."
  • The weighted average P/NAV is at 39%, and the average P/B is at 0.58, indicating potential undervaluation.

• Macro and Political Uncertainties:

  • Macro uncertainty, particularly from the UK referendum and potential Fed rate hikes, has dampened buyer sentiment.
  • Political events, including the Legislative Council and Chief Executive elections in 2016 and 2017, could introduce further uncertainty in housing policies.

Key Information

• Recent Trends:

  • The market is expected to remain range-bound in a slow-correction environment.
  • Developers are using their own balance sheets to offer financing options, which may not become a prevailing practice.

• Investment Recommendations:

  • Favor office landlords (Swire Prop and HKLand) for their defensive nature.
  • CKP is highlighted as a strong buy due to its strong balance sheet and better performance relative to peers.
  • HLP and SHKP are also recommended as buys due to their relatively defensive positions and strong fundamentals.

• Political Events:

  • Legislative Council election (Sep 2016) and Chief Executive election (Mar 2017) are key events that could influence housing policies in the next 12 months.
  • The government is unlikely to reverse cooling measures soon, pending clarity from these elections.

• Future Outlook:

  • A gradual decline in residential prices is expected from 2016E to 2018E, influenced by the anticipated 200bps increase in Fed Fund rates.
  • The increase in mortgage rates is expected to bring rates back to around 4%, similar to 2007 levels before the start of quantitative easing.

Conclusion

The Hong Kong real estate market is showing signs of recovery in volume but remains in a slow correction phase. The market is expected to bifurcate, with activity concentrated in the low and ultra-high-end segments. Developer financing incentives reflect weak demand, and the sector is currently undervalued. Political events in the next year may add further uncertainty, but the government is unlikely to reverse its cooling measures soon. Investors are advised to focus on defensive segments and companies with strong balance sheets.