Direct beneficiary of US rate cuts ahead
- We expect HK property share prices to rebound in 2024F as US cuts the Fed Funds Rate over the next three years.
- We are not as bearish as our analyst peers on HK home prices. We project a 3% decline in prices in 2024F, vs. double-digit decline forecasts by our peers.
- Lower interest rates, narrowing negative carry and demand from mainland Chinese buyers support our constructive view on the HK residential market.
- Reiterate sector Neutral on HK Property; positive on residential segment and negative on office segment. Top picks: SHKP, CK Asset and Link REIT.
US rate cuts could bode well for sector performance
Dragged by higher-than-expected US interest rate hikes in 2023, HK property share prices fell by 26% on average in 2023, underperforming the Hang Seng Index by 12% pts. As the US will likely enter a rate cut cycle over the next three years (US Federal Reserve projects 250bp Fed Funds Rate cuts by Dec 2026), we expect the share prices of HK property stocks to reverse their weak trends. As such, we recommend buying HK developers to capitalise on this potential favourable change in short-term rates.
We are not as bearish as our peers on HK home prices
In contrast to our investment house peers who expect HK home prices to fall in the double digits in 2024F, we remain constructive on HK home prices due to 1) the start of a US rate cut cycle this year which would boost property sales, 2) HKSAR Government’s (HKSARG) relaxation of harsh measures (e.g. stamp duties) and promotion of talent schemes, driving additional housing demand, and 3) further increase in residential rents in 2024F (+6% in 10M2023), leading to more home purchases from leasing (narrowing negative carry). We expect home prices in HK to fall by just 3% in 2024F, followed by a 2% gain in 2025F.
Huge residential demand potential from mainland Chinese
We estimate there are more than 300k inbound talents (mostly mainland Chinese) residing in HK, some of whom may be interested in buying flats following the HKSARG’s new measures. Assuming that just 10-15% of them buy a flat, this translates to total private home demand of 30k units (Fig 19), or more than two years’ primary home sales in HK.
Cautiously optimistic on retail; still challenging for office rental
We are cautiously optimistic on HK retail in 2024F. Although we expect a slow recovery in the economy, a rebound in visitor arrivals in HK could support retail sales (3% growth in 2024F). We, however, maintain our negative view on office rental in 2024F due to increasing supply and high vacancies – we expect Grade A office rents to fall by 5%.
Maintain sector Neutral; top picks: SHKP, CK Asset, Link REIT
We reiterate our Neutral sector rating for HK property but are constructive on the residential segment. We recommend investors stick to defensive developers, such as SHKP and CKA, on the back of their strong balance sheets and ability to tap into HK’s land market at low land costs over the next 12 months. For landlords, we prefer Link REIT for the declining 10-year US Treasury yield and conservative consumption by local shoppers. Key sector downside risks: higher-than-expected HIBOR, low property sell-through rates, and unexpected DPS/DPU cuts. Please refer to P.5 for upside and downside risks.
Highlighted Companies
CK Asset Holdings Limited
ADD, TP HK$48.80, HK$37.30 close
CK Asset Holdings’ 1.4% net gearing at end-Jun 2023 should help it replenish its landbank and undertake M&As at a low cost amid the slowdown in the global economy, as well as enable flexible capital
management activities, such as share buybacks, in our view.
Link REIT
ADD, TP HK$51.50, HK$42.50 close
Link REIT is a direct beneficiary of the declining US 10-year Treasury yield, as well as a mass-market-focused HK retail play in 2024F. Its 6.3% FY3/24F DPU yield is attractive, in our view.
Sun Hung Kai Properties Ltd
ADD, TP HK$101.1, HK$79.2 close
Sun Hung Kai Properties (SHKP) is a leader in both development properties (DP) and investment properties (IP) in HK, in our view. It has a contracted sales target of HK$33bn for HK DP in FY6/24F,
supported by its abundant saleable resources.