Hong Kong Property Sector 2015 outlook: Be Selective
Credit Suisse
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)
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