Hong Kong property developers hit fresh 1-year highs

The skyline of Hong Kong, where property stocks hit a year-peak as earnings from a stock market rally sparked an advance in the equity market. Photo: Bloomberg

Hong Kong property developers were the major beneficiaries on Monday of the weaker-than-expected mainland manufacturing data for April, lifting a number of the city’s brick-and-mortar shares to a fresh one-year high in the first trading day of May.

Shares in New World Development rose 5.4 per cent to a 52-week high of HK$10.86, after UBS raised the target price on the shares to HK$11.65, while Sun Hung Kai Properties rose almost 5 per cent to HK$135.3, another 52-week high.

Joining the other real estate shares that hit their highest level in one year, Sino Land and Henderson Land Development jumped 3.5 and 3.4 per cent respectively.

However, overall turnover of the properties shares remained subdued, with majority of shares which exchanged hands taking place in HSBC, AIA, and Tencent. The trio dropped 1.4, 1.1 and 1 per cent respectively.

All major state-owned lenders finished in red on Monday morning, with China Construction Bank being the only exception, rising 1.2 per cent.

China’s factory activity slowed more than initially thought in April, according to the final reading of HSBC/Markit’s data. The final April reading came at 48.9, down from the preliminary data of 49.4 that was released last month.

On a brighter note, Fonsun International, controlled by mainland billionaire Guo Guangchang, rose more than 5 per cent after China’s largest privately held conglomerate announced over the weekend it is buying US Insurer Ironshore for about US$2 billion.

- http://www.scmp.com/business/markets/article/1785572/hong-kong-property-developers-hit-fresh-1-year-highs

Hong Kong: China property leads gains in Hong Kong shares, casino stocks fall

http://www.businesstimes.com.sg/stocks/hong-kong-china-property-leads-gains-in-hong-kong-shares-casino-stocks-fall

[HONG KONG] Hong Kong and Chinese enterprise shares ended higher on the first trading day of the new year on Friday and posted their best week in the last five weeks, with Chinese property and financials stocks leading the way.

The Hang Seng index ended up 1.1 per cent at 23,857.82 while the China Enterprises Index gained 2.2 per cent to 12,245.35.

The blue-chip index is up 2.2 per cent for the week, while the China Enterprises Index climbed 5.95 per cent, fuelled by the strong sentiment in mainland markets, which have surged on expectations that Beijing will roll out more stimulus measures to support the slowing economy.

Shares of Chinese property developers in Hong Kong surged as reports of strong December sales eased worries about the cooling housing market. China Resources Land Ltd climbed 7.1 per cent, China Overseas Land and Investments Ltd 8.5 per cent and China Vanke 10.6 per cent.

Financial stocks also rose with Ping An Insurance jumping 5.1 per cent, China Life Insurance rose 3.1 per cent, and Industrial and Commercial Bank of China Ltd up 1.9 per cent.

China markets were closed for a holiday on Friday and will reopen on Monday.

Casino shares fell after the release of Macau's gambling revenue for December, with Wynn Macau down 3.7 per cent, Melco Crown sliding 2.7 per cent and Galaxy Entertainment losing 1.8 per cent.

Macau reported during the lunch break that its gaming revenue fell 30.4 per cent year-on-year in December and was down 2.6 per cent in 2014.

Shares in China's biggest trainmakers China CNR and CSR Corp in Hong Kong continued to rise after the two firms confirmed that they will merge. CNR surged 16 per cent and CSR leap 18 per cent.

Local buyers push Hong Kong home prices to new highs as mainland demand slumps

http://www.scmp.com/news/hong-kong/article/1648791/local-buyers-push-home-prices-higher

Mainland interest waning after stamp duty increases, agency figures show

Local buying is the key driver sending Hong Kong home prices to fresh highs, according to a survey, with demand from mainland buyers dropping to a six -year low in the third quarter and likely to shrink further.

Centaline Property Agency figures show that mainlanders buying flats as individuals accounted for 7.8 per cent of sales of new homes costing less than HK$12 million in the third quarter, down from 10.9 per cent in the second quarter and a peak of 35.5 per cent in the third quarter of 2011.

"Mainland buyers will continue to retreat from Hong Kong as their interest in buying has been reduced by the high stamp duties," said Wong Leung-sing, an associate director of research at Centaline. "It indicates that soaring mass-market home prices have mainly been driven up by local demand."

Mainlanders' overall spending on new Hong Kong flats fell to its lowest level since the fourth quarter of 2008, data showed. The survey found that mainlanders bought 8.6 per cent of new homes in the third quarter, down from 12.3 per cent in the second.

"Chinese buyers have virtually withdrawn from the Hong Kong property market," Wong said.

The survey counted all buyers with Putonghua names as mainlanders, he said, pointing out the figure would also include mainlanders who had secured permanent resident status after living in Hong Kong for seven years.

The Hong Kong government introduced a buyer's stamp duty of 15 per cent on non-permanent residents and those buying through companies in October 2012 in an attempt to curb rising prices.

Stamp duty was also doubled, to up to 8.5 per cent, on purchases of property valued at more than HK$2 million, except by first-time buyers.

In the secondary market, mainlanders accounted for 3.1 per cent of sales, down from 3.8 per cent in the second quarter.

They accounted for 22. 6 per cent of sales of new homes worth more than HK$12 million in the third quarter, down from 26.5 per cent in the second quarter and a peak of 49.3 per cent in the first quarter of 2011.

Hong Kong's housing market facing a slump in 2015

http://www.scmp.com/property/hong-kong-china/article/1645542/hong-kongs-housing-market-facing-slump-2015

Anyone looking for blue skies and sunshine in Hong Kong's property market could be disappointed. It's hard to find an analyst who can put a positive spin on prospects for next year, with predictions of price dips of at least 5 per cent in 2015. Some, such as Barclays property specialist Paul Louie, have forecast a plunge of as much as 30 per cent.

After four years of steady increases which have now slowed, analysts see a severe correction looming, as the combination of a surge in new supply, the effects of government-imposed cooling measures and next year's inevitable interest rate hike combine in a "perfect storm", according to Louie.

Hong Kong brokerage CLSA is slightly less pessimistic, expecting property prices to slump 15 per cent by the end of next year as the government's market-cooling measures bite.

"Prices will correct a little more if interest rates are raised and the economy weakens," Nicole Wong, CLSA's regional head of property research, says of the group's recent report on the Hong Kong and mainland property markets.

CLSA says Hong Kong property prices were already 3 per cent off their February peak. The brokerage had been expecting a 10 per cent decline by the end of next year but has now revised downwards to 15 per cent for 2015, given the increase in US Treasury bond yields and the Hong Kong government's decision to bring forward the presale of units due for completion next year.

On a positive note, Wong says property prices should not fall dramatically, even if interest rates go up and housing supply rise significantly next year.

"Property prices have started a mild decline," she says. "The pricing of new projects released recently is close to or lower than that of second-hand homes. It is a signal that a correction will happen."

The rate of growth in residential prices has already slowed, rising only 4.28 per cent year-on-year to the end of July, according to the Ratings and Valuation Department. This contrasts sharply with the 18.92 per cent year-on-year increase in July 2013.

This follows four years of rapid growth when prices jumped 117.2 per cent from December 2008 to December 2012, driven higher by a flood of liquidity after the global financial crisis.

But even a late summer upswing, when August saw sales of new homes leap 82.33 per cent year-on-year to 6,212 units, has failed to boost confidence. Louie says he doubts the volume of sales can be sustained, describing home prices as "very unaffordable". He expects a 30 percent correction by the end of 2015.

In recent years, the market has been propelled upwards by measures such as strict government controls on development, tight land supply, low interest rates and currency stability. This resulted in rises for 2009 of 28.5 per cent, 21 per cent in 2010, 11.1 per cent in 2011 and 25.7 per cent in 2012.

To curb price exuberance, November 2010 saw the government introduce a 15 per cent flip tax to stop speculation, and the stamp duty was raised to 8.5 per cent on units worth HK$20 million or more.

October 2012 introduced a buyer's stamp duty of 15 per cent charged on property bought by foreigners.

In February last year, the stamp duty on purchases over HK$2 million was doubled, but that measure lasted only a little over a year and ended in May.

So what lies ahead? Analysts see a number of drivers depressing property prices next year. "The possibility for an interest rate hike to finally come in late 2015 or early 2016 is one," says Mizuho Securities Asia analyst Shen Jianguang, adding that Hong Kong's interest rate rise may lag behind that in the US by a few months, but not by more.

Increasing housing supply is another factor, after beleaguered chief executive Leung Chun-ying committed to providing 470,000 new housing units in 10 years, including public and subsidised housing. "Long-term, it's hard to achieve this goal, but it means more supply is likely in the next few years," Shen says.

Another factor will be weaker economic momentum, "especially due to weakness in the retail sector and flagging visitor numbers amid the end of the tourism-driven boom in the past four years".

On the plus side, a consumer survey by City University shows that sentiment for the property market remains strong despite the Occupy Central protests, Shen says. In addition, renting is still more expensive than buying, pushing potential buyers to enter the market for smaller units.

There's also some discounting of new housing stock by developers. "The primary market is offering new supply on the cheap compared to existing housing," Shen says. "Generally, we expect housing prices to go down by 5 per cent in 2015, but it's unlikely to be more than that."

4 Top Hong Kong Property Picks

Hong Kong Property Sector 2015 outlook: Be Selective

Credit Suisse

Summary of Credit Suisse forecasts for 2015
	% YoY changes in assumptions		Cap rate (%)
	FY14	FY15E	FY14	FY15E
Residential (price)	7	-15	3.00-4.55	3.25-4.80
Office (rent)	5	15	4.75	5
Retail (rent)	0	0	4.75	5

Price corrections likely to be pushed forward to 2015

The price fall expectations did not materialise in 2014 as a combined result of persistently low interest rate and the DSD relaxation during the year. We forecast that in 2015 residential prices will correct by 15% YoY, and office and retail rents will change by +15% and 0% YoY, respectively. We expect a cap-rate expansion of 25 bp across the residential, office and retail property assets in 2015.

Economic fundamentals intact, but unexciting (1) Employment outlook: we have noted a modest drop in job vacancies, especially in retail, hospitality and F&B sectors since 2Q13. There is a possibility of a modest increase in the unemployment rate, and this might in turn slow down the momentum of home purchases by first-time buyers and upgraders. (2) Interest rate is likely to rise from 2Q15: Credit Suisse Economics team expects interest rates might start going up in 2Q15. (3) A challenging year for retail: retail sales normalisation appears to be structural, not cyclical, along with the continued anti-corruption campaigns.

Residential supply analysis

We have carried out a detailed analysis of residential completions that will take place over 2015-20E: (1) by completion year: an average of 12,900 units p.a. of residential completions are expected over 2015-20E, with a momentary surge in completions in 2018E; (2) by developer: SHKP, CKH, and Henderson Land are the top three developers in terms of market share (by units) in 2015-20E, accounting for 51% of the total supply; (3) by district: Yuen Long, TKO, Tsuen Wan and Kai Tak are the districts with the most abundant supply, accounting for 42% of the total supply in 2015-20E, and by (4) by land acquisition year: the residential completions during 2015-17E are mostly driven by the land bought in 2012 or before. The cheaper land bought in 2013 or after would be reflected in the completions in 2018 and beyond.

Retail: Lacklustre state likely to continue

In 2015, we expect the retail rent growth momentum to further decelerate and merely stay flat YoY, as a combined result of: (1) leases signed for the aggressive expansion back in 2012-13 being due for renewals in 2015; and (2) market risks emerging from the street protests in Hong Kong; however, this could be partly offset by (i) rental renewal pressure in 2015, proxied by the magnitude of positive rental reversion staying the lowest since 2011; and (ii) a potentially two-tiered performance of street stores and shopping malls, and the outperformance of shopping malls because of their proactive management.

Stock selection. Our pecking order among sub-sectors is office landlords, followed by developers and retail landlords. Our Top Picks for 2015 are Hongkong Land ( H78.SG ), Henderson Land ( 0012.HK ), Sun Hung Kai Properties, and Wharf Holdings ( 0004.HK ). 

Hongkong Land is our top pick, as we expect a rental boom in Central office in FY15.

We like Henderson Land, given its improving asset turnover, expected progress in the land conversion arbitration system, and the continuous share purchase by the chairman. We like SHKP for its quality and diversified portfolio in Hong Kong and China, and impressive execution at project launches.

Among retail landlords, we only prefer Wharf, with the ripening of its IP portfolio in China and enhanced returns upon the asset enhancement initiatives (AEI).

Other rating changes: We downgrade Link REIT ( 0823.HK ) to UNDERPERFORM(from Neutral) on a rising interest rate scenario; downgrade Hysan Development (0014.HK ) to NEUTRAL (from Outperform) amid a challenging outlook for the retail sector. The key investment risks to our calls are a quicker-than-expected turnaround in the Chinese economy and its property sector, delay in interest rate hike, and higher-than-expected market risks driven by street protests.

Valuation summary

Hong Kong - Developer s	Ticker	Rating	Share price (HK$)	Target price (HK$)	up/down %	Market cap (US$bn)
Cheung Kong	0001.HK	O	140.4	161	15%	42
SHKP	0016.HK	O	116.4	140.64	21%	41
Henderson Land	0012.HK	O	52	62.48	20%	20
Wheelock	0020.HK	O	37.2	46.61	25%	10
New World Dev	0017.HK	N	9.7	10.45	8%	11
Sino Land	0083.HK	O	13	15.3	18%	10
Kerry Properties	0683.HK	O	26.8	31.63	18%	5

Source: Credit Suisse estimates

Valuation summary

Hong Kong - Investors/REITs	Ticker	Rating	Share price (HK$)	Target price (HK$)	up/down %	Market cap (US$bn)
Wharf	0004.HK	O	55.8	69.22	24%	22
Swire Properties	1972.HK	N	25.1	28.39	13%	19
HKLand (US$)	HKLD.SI	O	6.9	9.09	31%	16
H ang Lung	0101.HK	N	23.2	25.54	10%	13
L ink REIT	0823.HK	U	48.8	39.05	-20%	14
Hysan	0014.HK	N	36.9	40.07	9%	5
Hopewell	0054.HK	O	27.8	35.43	27%	3
Champion REIT	2778.HK	O	3.5	4.36	24%	3
Great Eagle	0041.HK	U	25.5	20.5	-20%	2

Source: Credit Suisse estimates

-- Joyce Kwok, Wayne Lee, Kelvin Tam, Jinsong Du (Analysts)

Stability will only return when Hong Kong ends its property tyranny

http://www.scmp.com/comment/insight-opinion/article/1616266/stability-will-only-return-whenhong-kong-ends-its-property?page=all

Andy Xie says Hong Kong must restructure its property market to help ordinary people - rather than milking them for the benefit of the business elite - if stability is to return

Sky-high property prices are the root cause of the ongoing social instability in Hong Kong. When the average household would have to put aside all their salary for 10 years to afford to buy the space for a bed - never mind eating and drinking, and other living expenses - or that incomes have grown by only 10 per cent in a decade, where is the hope for ordinary people, especially the young? Unless Hong Kong restructures its property market to serve the people, instead of milking them to the last drop, the city won't see stability again.

Hong Kong has been run like a medieval city state. A business elite at the top has the dominant voice on how wealth and income are created and distributed. Hong Kong's system encourages people to make money with maximum economic freedom and low taxes.

Tight land supply adds to the problem - often a result of hoarding by a few of the big boys. The banking system is structured to load people with a mountain of debt, which means people must work even harder to keep their tiny apartment.

The system worked when incomes were rising rapidly. When China was not fully open up to the world, Hong Kong had plenty of opportunities as a bridge between the two, and could charge a hefty premium for the service. After China joined the World Trade Organisation, those opportunities as a middleman vanished. Taxing people with ever higher property prices couldn't work anymore. But Hong Kong's system didn't adjust to the new reality. The ensuing instability is hurting everyone. The city's ruling elite, through uncontrollable greed, have done themselves in.

In contrast, Singapore has been run like a proper dictatorship. The system doesn't do stupid things to hurt its ruling class. It focuses its greed on foreigners and distributes the spoils among the people through good public housing, quality education and health care, and a nice pension. Most Hong Kong people seem to like Singapore.

When you think about it, medieval city states like Florence and Venice flourished using the same policies. They used strong militaries to protect their trade monopolies and, sometimes, just looted others when opportunities arose. Because their ruling elite had the wisdom to distribute the loot among all contributors, their enterprises or scams lasted for centuries. Their luck finally ran out when rising nation states built bigger militaries.

Both Hong Kong and Singapore are leftovers of the British colonial era. They have enjoyed much higher incomes than their giant neighbours by arbitraging their inefficiencies. The business model is not so different from Venice or Florence centuries ago. As their neighbours change, they must adapt to sustain their income premium. Instead of building ships or making semiconductors, Singapore has switched to casinos and private banking. Maybe these businesses don't smell so good, but they bring in the money to buy social peace.

Hong Kong hasn't adapted. When the old model doesn't work, the instinct here is to squeeze supply further. When the price is too high, let's carve a flat into several smaller ones. Wouldn't that make housing affordable? Hence, mini-flats have now become popular for speculators. But, even mini-flats are unaffordable. What's next? Should people learn to sleep standing up or hanging upside down?

The usual excuse against change is that Hong Kong doesn't have land. This is a big lie. Only 4 per cent of Hong Kong's land is given over to residential use. There is the same amount of reserved development land, and big developers hold a considerable chunk of it. Singapore has been developing mainly on reclaimed land. It has a real physical shortage, but has kept public housing cheap and spacious. Land isn't a constraint to Hong Kong's development.

What stands in the way is Hong Kong's ruling elite, a leftover from the colonial era, hanging onto the old model no matter what. Since they don't have other sources of competitiveness, changing would mean the end to their privileged status. This is why meaningful change won't happen through consultation among the elite. Some force has to impose the change. If Beijing wants stability in Hong Kong, it must focus on property, which means ditching its business friends.

In addition to artificially controlled land supply, interest rates play a role in the price cycle. But this confuses the debate. The interest rate cycle introduces volatility. So, if the US Federal Reserve raises rates to 3 per cent within three years, Hong Kong's property prices may fall by 50 per cent over that time.

Yet housing still wouldn't be affordable. When the price begins to fall suddenly, the debate will surely shift, and political support for limiting supply will return. Hong Kong could repeat the cycle.

Ruling Hong Kong requires a long-term vision, not the zig-zagging we've seen since the handover. During the Asian financial crisis, Hong Kong abandoned its expanded, but still modest, public housing programme, laying the seeds for today's instability. Policy responses now should focus not only on short-term issues.

Hong Kong Home Prices Seen Firm as Volume Drops Amid Protests

http://www.bloomberg.com/news/2014-10-16/hong-kong-home-prices-seen-firm-as-volume-drops-amid-protests.html

Hong Kong’s existing home transactions dropped amid pro-democracy protests now in the third week. Prices are holding firm.

The number of homes changing hands fell about 20 percent so far this month, compared with the same period in September, as buyers and sellers become more cautious, according to Sammy Po, residential chief executive at realtor Midland Holdings Ltd. While some homeowners have been more willing to accept prices cuts of as much as 3 percent since the protests began, most haven’t budged, Po said.

Home prices, which hit new highs last month, won’t be significantly affected by the political standoff that saw as many as 200,000 protesters occupy Hong Kong’s key roadways, said property broker Savills Plc. Homeowners aren’t in a hurry to offload their properties, even as some potential buyers are deterred by the city’s political uncertainties, according to Citigroup Inc.

“It’s a normal reaction for people to take a wait-and-see approach,” said Wong Leung-sing, an associate research director at Centaline Property Agency Ltd., Hong Kong’s largest privately held realtor.

Existing home prices, tracked by Centaline, dropped 0.4 percent in the week ended Oct. 5 after the protests started on Sept. 26. Prices, which declined as much as 5.2 percent since the government doubled a property tax in February last year, have rebounded 7.3 percent this year.

Forecast Cut

Protesters are demanding elections of Hong Kong’s chief executive free from the influence of China in 2017. The rally that started outside the government headquarters has spread to main arteries in the city’s main business district and prime shopping areas, and has prompted Bank of America Corp. to cut its economic growth forecast for Hong Kong this year.

“If it persists and worsens, it will affect people’s livelihood and the economy,” said Midland’s Po. “Then the weakened purchasing power will affect the property market.”

The chance of the movement seriously disrupting Hong Kong’s economy is slim whereas the probability of rising interest rates is much higher and likely to have a greater impact on housing demand, said Nicole Wong, regional property research head at CLSA Ltd.

Hong Kong rates track those in the U.S. because the local currency is pegged to the U.S. dollar.

“The market will likely remain in its current state -- rising prices amid low volume -- until rates increase,” said Wong, who called for home prices to drop 10 percent next year and a further 5 percent in 2016.

Political Outlook

Three projects have been offered by developers since the start of the protests, including a 1,092-unit project by New World Development Co. (17) and Henderson Land Development Co. (12) All three have had “decent sell-through rates,” Ken Yeung and Oscar Choi, Citigroup analysts, wrote in an Oct. 14 note.

The Hang Seng Property Index tracking returns of nine developer stocks, declined 1.9 percent since Sept. 26, compared with the 2.8 percent drop in the benchmark index.

Developers have lured buyers from the existing home market with discounts and subsidies, narrowing the premium that usually is paid for new flats, since the government slapped on three rounds of taxes aimed to control surging prices. New World, for example, offers as much as a 6 percent cash discount as well as rebates on property taxes at its Pavilia Hill residential development, one subway stop from the prime shopping district of Causeway Bay.

The protest movement “isn’t particularly germane to prices or volume,” said Simon Smith, senior director of research and consultancy at Savills, citing government measures as the main damper on transactions. “We’ll have to reconsider if the disruptions last considerably longer. As yet, it’s far too early to say.”

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net Tomoko Yamazaki