20160912-高盛-Direction_of_regulations___policies_will_continue_to_impact_property_sector_fundamentals_15页_795kb

Summary of Hong Kong Real Estate Market Analysis

Core Content

This document provides an analysis of the Hong Kong real estate market, emphasizing the impact of local regulations and government policies on property fundamentals. It also outlines the upcoming legislative and executive elections, their potential implications, and the current valuation status of major property companies and REITs in the market.

Main Points

Impact of Regulations and Policies

• Regulatory Influence: Local regulations and government policies significantly affect the real estate sector fundamentals.
• Key Policies: Examples include buyer stamp duty (BSD), double stamp duty (DSD), the private land supply target of 18,000 units per year, the infant formula export ban, changes in multiple-entry permit rules, and restrictions on non-local pregnant women delivering in public hospitals.
• Valuation Discount: The real estate sector is currently trading at a 35% discount to NAV, which is wider than the 24% average over the past 20 years.
• Political Uncertainty: Investors are increasingly concerned about the political and policy uncertainty due to the divided political landscape in the Legislative Council (LegCo) and the upcoming Chief Executive (CE) election.

Legislative Council (LegCo) Election

• Recent Election: The LegCo election on September 4, 2016, had a record turnout of 2.2 million voters (58% of the electorate), the highest since 1991.
• Composition: The LegCo has 70 members, with 35 elected through direct elections and 35 through Functional Constituencies (FCs), including Super Seats.
• Voting System:
  • Direct Elections: Use proportional representation.
  • Functional Constituencies: Use preferential elimination for some FCs and first-past-the-post for others.
• Political Divide: The political divide is expected to continue in the new LegCo session, with new fractures from localists and tension with Mainland China.

Chief Executive (CE) Election

• Upcoming Election: The CE election is scheduled for March 26, 2017, with nominations by a 1,200-member committee starting in December 2016.
• Eligibility Criteria:
  • Must be a Chinese citizen with permanent Hong Kong residency.
  • Must be aged 40 or above and have resided in Hong Kong for at least 20 years.
  • Must be nominated by at least 150 members of the Election Committee.
• Election Committee: Composed of 1,200 members from various sectors, including LegCo, District Council, NPC, CPPCC, and Heung Yee Kuk.

Market Performance by CE Term

Valuation Summary

• Property Companies trade at a 35% discount to NAV, with historical range of 30.8% discount.
• PBR Ratio: 0.70X, below the historical range.
• Key Companies:
  • Cheung Kong Prop. (1113.HK): Buy, 13.2% potential upside.
  • Swire Prop (1972.HK): Buy, 25.1% potential upside.
  • Hysan (0014.HK): Sell, 24.3% downside.
  • Link REIT (0823.HK): Neutral, 7.0% downside.
  • Fortune REIT (0778.HK): Neutral, 10.8% downside.
  • Champion REIT (2778.HK): Sell, 22.8% downside.

Political and Market Implications

• Political Divide: The political divide in LegCo is likely to continue, affecting policy continuity and market stability.
• CE Election Impact: The outcome of the CE election will determine future policy direction and market visibility.
• Investor Focus: Investors are increasingly concerned about policy uncertainty and political balance in LegCo.

Key Information

• LegCo Elections: Direct elections for 35 seats and FC elections for the remaining 35.
• CE Election: A 1,200-member committee selects candidates, with voting in March 2017.
• Valuation Discount: 35% discount to NAV, reflecting political and macroeconomic concerns.
• Policy Impact: Policies like BSD, DSD, and land supply targets have shaped the real estate market over the years.
• Investment Ratings: 31% Buy, 54% Hold, 15% Sell for the global equity coverage universe.
• Investment Banking Relationships: 66% Buy, 60% Hold, 50% Sell in terms of investment banking services.

Conclusion

The real estate market in Hong Kong is heavily influenced by regulatory and political developments, with current valuations reflecting uncertainty and divided political camps. Investors are advised to monitor the LegCo and CE elections for policy continuity and market stability. The valuation discount and investment ratings highlight the market's current sentiment and potential for future performance.