Rate hikes unlikely to deter primary sales
? Despite faster rate hikes, we think developers will continue to achieve high
sell-through rates in 2H22F by pricing primary flats conservatively.
? Office rents will still largely be under pressure in 2H22F, on the back of new
completions amid the prolonged closure of HK’s borders.
? Except for Link, which is mass-market focused, we expect retail landlords to
experience mildly negative rental reversions due to weak economic recovery.
? We prefer SHKP and HLD among developers for their strong sales pipelines.
We also like Link among landlords for resumption of positive rental reversion.
Conservative primary pricing to enable high sell-through rates
Although the interest rate hike cycle came faster than we expected, recent primary
launches by key HK developers have continued to receive upbeat response from
homebuyers: our statistics show that the 15 primary projects first launched in 1H22
achieved an average sell-through rate of 74%. We believe developers will continue to
employ the strategy of pricing primary flats conservatively (i.e. setting primary ASPs close
to the secondary ASPs of nearby projects) in 2H22F, to absorb homebuyers’ pent-up
demand and make up for the loss of sales during the fifth wave of the Covid-19 outbreak.
More softening of HK office rents through 2023F
HK’s office rents have stabilised a bit in 1H22, supported by leasing activities after the peak
of the fifth wave of the Covid-19 outbreak. However, as 7.4m sq ft of new office space
enters the leasing market from 2022 to 1Q24, we expect office rents to soften further from
2H22F through 2023F, leading to an extended trend of negative rental reversions for office
landlords.
Faster recovery for mass market-focused retail landlords
HK’s retail sales in May 22 came weaker than expected, despite consumption vouchers
and relaxation of social distancing measures. We think meaningful recovery of HK’s retail
sales is unlikely until a clear road map for the reopening of HK’s borders is published by
the HKSAR government. Amid weak recovery of HK’s economy, mass market-focused
retail landlords should recover, in terms of rental reversion, faster than high-end or luxury focused peers, which rely heavily on inbound tourists.
Reiterate sector Neutral; preferred names: SHKP, HLD, Link
We reiterate our sector Neutral rating on HK property but remain positive on developers
(trading at 0.2 s.d. above the 5-year average discount to NAV). We prefer SHKP and HLD
among HK developers for their strong primary launch pipelines in the next 6-12 months
and their huge saleable resources that could be converted from farmland reserves in the
New Territories. We also like Link REIT for the resumption of positive rental reversions of
its HK malls and potentially DPU-accretive acquisitions. Key downside risks for the sector:
a prolonged Covid-19 outbreak in HK, prolonged closure of HK borders, and a decrease in
secondary home prices. Reopening of HK’s borders is a key upside risk for the sector.