20160712-高盛-Hong_Kong__Real_Estate__Look_for_defensive_yields_among_PropCos_as_HREITs_have_become_relatively_more_expensive_18页_652kb

Hong Kong: Real Estate Summary

Core Content

This report provides an analysis of the Hong Kong real estate sector, focusing on the valuation and dividend performance of property companies (PropCos) and Real Estate Investment Trusts (REITs). It highlights the relative attractiveness of defensive yields among PropCos, the valuation dynamics of HREITs (Hong Kong REITs), and the potential for future growth in the sector.

Main Points

1. HREITs Valuation and Performance

• HREITs (Hong Kong REITs) have become relatively more expensive, trading near the upper end of their 5-year historical valuation range.
• Since 2009, HREITs have outperformed other property peers, mainly due to the low interest rate environment.
• The average dividend yield spread for HREITs has been between 270 to 390 bps over the past three years, with the current spread at 350 bps.
• Even in the most optimistic (bull case) valuation scenario, HREITs have only 8.6% implied valuation upside, with Link REIT showing the highest upside at 14.6%.
• The 12-month forward dividend yield for HREITs is now at 4.8%, slightly below the 5-year average of 5.6%.

2. HK PropCos' Dividend Yield and Payout Ratio

• HK property companies offer an average 3.8% dividend yield for FY16E, despite a 50% payout ratio.
• This yield is considered defensive, as the absolute level of dividend per share (DPS) is supported by high recurring cash flow, even in the event of rental price declines.
• Among the 9 non-REIT HK PropCos, 6 increased dividends in the latest results, with an average increase of 12.3%, and only 2 kept dividends flat or down year-on-year.

3. Buy-Rated HK Property Names

• The report recommends several HK property companies, including Cheung Kong Property (CKP), Swire Property, Hang Lung Properties (HLP), Hongkong Land, and SHKP, for their defensive nature and positive outlook.
• These companies trade at an average 3.6% FY16E dividend yield, are 45% discounted to NAV, and offer an average 35% upside to target prices as of July 8, 2016.
• Their dividend payout ratios are more than 1.4X covered by rental earnings, indicating strong financial support.

4. Valuation Comparison

• The report includes a detailed valuation comparison table of HK property companies, REITs, and their respective metrics such as:
  • Forward NAV
  • Price-to-book (PBR)
  • Price-to-earnings (P/E)
  • Dividend yield
  • Potential upside/downside to target prices
• The weighted average of these companies is at 3.8% dividend yield, 0.61X PBR, and 16% 12-month forward yield.

Key Information

5-Year Historical Valuation Context

• HREITs have moved up 8% since the Brexit vote, outperforming traditional HK property companies (up 4%) and MSCI HK (flat).
• The report highlights that HREITs have been outperforming other property peers since 2009, driven by low interest rates.

12-Month Forward Dividend Yield Bands

• The report evaluates dividend yield bands based on three valuation scenarios:
  • Bull case: Based on -1SD levels of government bond yields and spread.
  • Average case: Based on average levels of government bond yields and spread.
  • Bear case: Based on +1SD levels of government bond yields and spread.
• Under the bull case scenario, HREITs have an average 8.6% implied valuation upside, while Link REIT has the highest at 14.6%.
• Under the average case, the implied valuation upside is -11.0%, and under the bear case, it is -24.3%.

Structural Shift Toward Investment Properties

• There is a long-term structural shift toward investment properties (IP) among HK developers, with recurring income expected to account for over 50% of total EBITDA by 2020E.
• This shift is attributed to:
  • A slow pace of land banking in HK and China.
  • Continued addition of new investment properties.
  • Positive rental reversion for office and non-discretionary retail properties.

Dividend Payout and Earnings

• Developers generally pay out dividends in line with rental earnings, with NWD being an exception, where rental income contributes only 16.4% of FY16E EBITDA.
• The report suggests that as recurring income grows, developers may increase dividend payouts.

Conclusion

HK property companies, particularly those with a strong focus on investment properties and defensive dividend yields, are seen as attractive investment options compared to other sectors and historical valuations. The report highlights the potential for growth in recurring income and dividend sustainability, making them appealing for investors seeking stability in a low-rate environment. However, HREITs, while still performing well, are considered overvalued and offer limited upside in the current market conditions.