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1H21 wrap-up: residential a better choice

■ We expect HK home prices to stay buoyant through to 2022F due to genuine end-user demand, low interest rates, and declining unemployment rates.
■ Retail assets should still fare better than offices in view of local consumption revival; upcoming office supply may put pressure on office rents in 2022-23F.
■ Reiterate sector Neutral. SHKP, HLD, NWD and LINK REIT are our preferred picks for HK property stocks.

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Residential properties: multiple factors to drive prices higher

HK developers continue to benefit from buoyant property prices, on the back of low mortgage rates (~1.5% on HIBOR-basis), declining unemployment rates (5.0% as of Jul 2021), buyers’ home upgrade plans (particularly for flats priced HK$10m-20m each), and faster farmland conversion. We expect primary transactions to increase 10%/3% yoy in
2021F/22F, and that large-cap developers with plenty of saleable resources (e.g. SHKP, HLD) will stand to benefit the most from the buoyant property prices.

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Retail properties: mass-market centric landlords to recover first

HK’s retail sales rebounded 8% yoy in 7M21. We believe the existing electronic vouchers disbursed by the HKSAR government is spurring local consumption, particularly in the low-to mid-end segment which benefits Link REIT the most among the retail landlords under our coverage. Going forward, the recovery in high-end retail sales, e.g. at the retail assets of Wharf REIC, would rely on border re-opening and relaxation of quarantine measures imposed on inbound tourism, but this looks unlikely to happen in 2021F, in our view.

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Office: narrowing rental gaps between Central and other districts

HK’s office segment remained weak in 1H21, with about 0-7% YTD decline in office rents after about 15% yoy decline in 2020. Yet we see narrowing rental gaps between Central and key decentralised districts suggesting possible relocation of tenants back to Central in the future. However, new completions could pressure office rents in 2022-23F, in our view. We expect rental reversions to remain negative for the rest of 2021F. Corporate actions of individual companies, such as HKL’s share buyback programme, could lift stock prices of office landlords.

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Reiterate Neutral; top picks: SHKP, HLD, NWD and Link REIT

Reiterate Neutral on HK property. We prefer developers to landlords, as developers stand to benefit from local demand for residential properties. Even though developers are trading at 1.3 s.d. from their five-year average discount to NAV (56%), we believe a further increase in property prices could result in a further re-rating of developers. Our top developer picks are SHKP, HLD and NWD. Among landlords, we like Link REIT as we expect its mass market-centric retail portfolio to benefit from the e-voucher scheme. Key upside risks include an unexpected removal of tightening measures in the property market, while a prolonged Covid-19 outbreak could be a downside risk for the sector.