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Summary of China/Hong Kong Property Sector Analysis (July 14, 2016)

Core Content

This report provides an analysis of the Hong Kong property market, focusing on residential, office, retail, and property developers, including REITs and diversified property holdings. The market is expected to remain volatile due to economic challenges and the ongoing residential price correction.

Main Points

Residential Market

• Price Correction: The residential price correction is only halfway through, with an expected 10% annual decline in 2016 and 2017.
• Market Response: New project launches received mixed responses, with mass-market projects performing better than those targeting upgraders.
• Sales Performance: SHKP led in sales with high take-up rates for projects like Ocean Wings and Park YOHO Venezia.
• Secondary Market: The secondary market remained sluggish, with a 40% year-on-year decline in transaction volume and value, similar to the SARS period in 2003.
• Future Supply: More residential projects are expected to launch in Tuen Mun, Tseung Kwan O, and Kai Tak in the second half of 2016 and 2017.

Office Market

• Positive Outlook: The office market is in better shape compared to residential and retail, with sustained demand from Chinese enterprises.
• Rental Growth: Office rents are expected to rise by 3–5% in 2016, with Central leading at 5–10% growth.
• Valuation: Office landlords such as Hongkong Land and Swire Properties are attractively valued.
• Chinese SOEs: Chinese SOEs are actively acquiring quality office assets, indicating strong interest in the market.

Retail Market

• Challenges Remain: The retail sector continues to face weak inbound tourism and a negative wealth effect from the residential market.
• Sales Decline: Retail sales are expected to fall by 8% in 2016, following a 3.7% decline in 2015.
• Rental Adjustments: High street shop rents are expected to correct by 10–20%, while shopping malls with a diversified trade mix may maintain steady rentals.
• Luxury Brands: International luxury brands are consolidating their store portfolios, with more closures anticipated.

Property Developers

• Valuation Discount: Developers are trading at a 41% discount to NAV, which is 1SD below the 10-year average of 25%.
• Stock Recommendations: SHKP and Cheung Kong Property are recommended for their strong execution and financial strength, respectively.
• Performance: SHKP exceeded its FY16 contracted sales of HK$27bn, while other developers like Kerry Properties and Lai Sun Dev also showed good performance.
• Mortgage Plans: Developers introduced mortgage plans to boost sales, with SHKP’s Park YOHO Venezia being a notable example.

Property Investors

• Discount to NAV: Property investors are trading at discounts ranging from 46% to 55% to NAV, with an overall sector discount of 48%.
• Preferred Investors: Office landlords such as Swire Properties and Hongkong Land are preferred due to their strong fundamentals and attractive valuations.
• Wharf and Hysan: Wharf and Hysan Development are downgraded to HOLD due to the weak retail sector, although Wharf may benefit from unlocking its CME business value.

REITs

• Strong Performance: REITs have outperformed in a volatile market, with a weighted average distribution yield of 4.4%.
• Outperformance Expected: REITs are likely to continue outperforming due to the Fed’s gradual interest rate approach post-Brexit.
• Preferred REITs: Link REIT and Fortune REIT are highlighted for their strong performance and diversified trade mix.

Key Information

• HSI: 20,564
• Analysts: Jeff Yau and Andrew Robert Lam
• Stocks and REITs: Several property developers and REITs are recommended with buy or hold ratings, based on their valuations and market performance.
• Project Launches: Major projects are expected to be launched in Tuen Mun, Tseung Kwan O, and Kai Tak in the second half of 2016 and 2017.
• Market Trends: The primary market is expected to see a 18% year-on-year decline in transactions for 2016, while the secondary market remains subdued.

Summary Table