20160518-高盛-Five_FAQs_from_conversations_with_investors_in_Hong_Kong_and_Singapore__CL-Buy_CKP_15页_591kb

Hong Kong Real Estate Summary

Core Content

This document provides an analysis of the Hong Kong real estate market based on insights from conversations with investors in Hong Kong and Singapore. It outlines five frequently asked questions (FAQs) and addresses them with detailed market observations and forecasts. Additionally, it includes a valuation summary, growth assumptions, and data on transaction volumes and retail performance.

Main FAQs and Answers

1. Does April's pick-up in residential transactions suggest a broad-based recovery?

• April 2016 saw a significant increase in total residential transaction volume, up 150% yoy compared to 1Q, with primary transactions up 200% and secondary up 136%.
• However, the volume is still 3% below the average run-rate of 2Q15.
• The increase is attributed to seasonality and exceptionally low volume in 1Q, not a broad-based recovery.
• The market remains skewed towards small-ticket units, with 39% of primary transactions under HK$5 million, compared to 17% / 22% in 2014/2015.
• The author suggests a "bi-polar" recovery with limited broad-based improvement.

2. Would office landlords cut their rents aggressively in the near-term?

• Office rental growth in Central was +2.5% qoq in 1Q16, despite a slight increase in vacancy to 1.4%.
• The office segment is considered the most defensive due to tight supply and stable demand, especially from Chinese corporates.
• HKSCF granted 59 net new licenses in 1Q16, up from the quarterly average of 57/34 in 2015 and 2012-2014.
• Office landlords are willing to accept higher vacancy without lowering rents, given the low vacancy levels and demand for prime space.

3. Do early signs of recovery in PRC arrivals growth offer hope for retail sales?

• PRC arrivals increased 7% yoy during the Labor Day Weekend, indicating some stabilization.
• However, retail sales in April 2016 still fell -9.8% yoy, less severe than the -13.6% in Jan/Feb 2016.
• The decline in per capita spending by tourists and weak local spending continue to pressure retail.
• The SOGO Tsimshatsui store, which is heavily reliant on PRC tourists, only saw a single-digit decline, while Causeway Bay SOGO experienced a double-digit drop, highlighting the segment-specific impact of tourist spending.

4. What is the likelihood of a reversal of housing policies in the near-term?

• The Administration believes current property prices in HK are unaffordable, and thus there is no incentive to reverse cooling measures.
• Major elections over the next 12 months are expected to maintain the status quo.
• The residential sector is expected to face continued high prices and low volumes, with a 20% decline in prices over 2016E-2018E due to interest rate hikes and limited selling pressure.

5. What's the key risk to our CL-Buy on CKP?

• CKP is recommended for its small residential land bank and strong balance sheet, which supports capital management and M&A.
• The key risk is an uneventful period with no major M&A activity, which may not be negative due to the uncertain macro environment.
• The strict margins requirement of CKP may limit its ability to expand, but this could also be a positive constraint in a challenging market.

Key Information

• Residential market is expected to see gradual price adjustments over the next few years.
• Office market is the most defensive segment, with positive rental growth and low vacancy.
• Retail market remains weak, driven by soft tenant sales and declining tourist spending.
• CKP is recommended as a CL-Buy due to its strong financial position and potential for growth.
• The overall market is trading at significant discounts to NAV, with the developer sector at 51% discount and landlords sector at 45% discount.
• Dividend yields are near historical highs, indicating potential value for investors.

Ratings and 12-Month Target Prices (TPs)

Growth Assumptions

• Residential: Expected to decline by -10.0% in CY2016E and -5.0% in CY2017E, with a -5.3% YTD decline.
• Office: Expected to grow by 0 to +3% over the next two years, with positive rental growth and low vacancy.
• Retail: Expected to see weak price/rental growth, ranging from 0 to -10% in CY2016E and 0 to -5% in CY2017E.

Market Conditions and Outlook

• The residential sector is expected to remain challenging, with high prices and low volumes.
• The office segment is defensive, with positive growth and stable demand.
• Retail remains weak, with soft tenant sales and declining tourist spending.
• The overall market is discounted to NAV, with low price-to-book (P/B) ratios.
• Dividend yields are high, indicating value appeal.

Conclusion

The report suggests that while there are some signs of recovery, particularly in residential transactions and office rentals, the HK real estate market remains challenging overall. CKP is highlighted as a CL-Buy due to its strong balance sheet and potential for M&A. Investors should consider valuation discounts, dividend yields, and segment-specific risks when evaluating real estate opportunities in HK.