Hong Kong Property:US rate hike,HK mortgage rate unchanged

Event

The top-4 mortgage providers in Hong Kong (BOCHK, HSBC, Hang SengBank and Standard Chartered Bank), accounting for 65% market share,announced they would not raise the mortgage rate despite the US rate hike,inline with our expectations. (For details please refer to our note, Hong KongProperty - Expecting dovish and lukewarm US rate hike). We believe it is oneof the positives for the HK property market, which should help to stabilize thecurrent overly bearish sentiment. In the coming months, a rebound in monthlytransaction volume would be a key sign of market stabilization. It couldindicate a willingness of buyers to return and the ease of buyers in digestingthe rate hike event. We see more upside than downside for selectivedevelopers in 2016. Our picks are Sun Hung Kai and CK Property.

Impact

What are banks saying? Hang Seng Bank expects does not see a specificneed to increase the local commercial borrowing and mortgage rates incoming 3-6 months. HSBC commented that the US interest rate hike is withinmarket expectations and there is sufficient liquidity at banks, and thus isleaving both borrowing and saving rates unchanged.

Sufficient liquidity in aggregate balance (interbank liquidity). As of 17Dec, the aggregate balance in HK amounted to HK$395bn, versus HK$296bnat end-August 2015, suggesting an inflow of HK$99bn over the past 3months. The USDHKD FX rate remains strong at 7.7521. Our Chinaeconomist Larry Hu believes these are largely from China following the 11Aug RMB devaluation. There could be more cash inflow from China to HongKong due to a gradual renminbi depreciation and upcoming interest rate cuts,in our view. If there is no material cash outflow from the market, we see alimited probability of banks increasing the mortgage rate.

What would the key focus be in the coming months? Volume. We view arebound in monthly transaction volume as a key sign of market stabilization. Itcould indicate a willingness of buyers to return and the ease of buyers indigesting this interest rate hike event. Average secondary monthly volume inthe residential market in October and November was 1.7k units, reaching anew low in 25 years. This is in contrast to the average of 3.6k units in 2014and 9.3k in 2010.

Views on HK property: We prefer Hong Kong developers to HK landlords/REITs in 2016. We see more upside than downside for selective developers.

Key supports include: 1) policy stance changing from tightening to neutral; 2)2) primary sales capturing market share; 3) attractive valuations and 4)accumulated unmet demand (262k households) over the past 10 years.

Outlook

Valuations of HK developers look attractive to us and comparable to thetrough levels in 2003 and 2008, presenting buying opportunities for selectivestocks. We expect property prices to correct 5% in 4Q15, and be flat in 2016Eand 2017E, which is not a material market correction. The sector trades at a0.54x PB, 9.5x 2016E PE and a 48% discount to NAV.