Hong Kong Property:More mortgage rate cuts to come

Event

Bank of China (HK), the second-largest mortgage provider in HK, and WingLung Bank, the first bank to offer the fourth mortgage rate cut this year,conducted media interviews and shared their outlook over the weekend. Weview their messages as positive for HK developers. We expect the HKresidential market’s recovery will continue, which bodes well for investmentopportunities in the sector in 2017. For details, see our note ‘Hong KongProperty: The party has just begun’.

Bank of China (HK) expects mortgage rate to drop another 5-10bps inthe coming 12 months. The effective rate will become 1.59-1.64% (HIBORplus 130-135 bps, sing 1-month HIBOR of 0.29%). BoC (HK) expects HKbanks to maintain low mortgage rates to attract business despite a potentialUS interest rate hike in December. The bank cites abundant interbank liquidityand subdued loan demand across the banking system. Most banks will followif any one of the banks lowers its rate or offers higher incentives.

It is consistent with our view that banks are supportive towards the propertymarket, leading to a sustainable market recovery. HK mortgage rates aremore related to HK interbank liquidity and don’t necessarily follow US interestrate hikes solely (spread between HK and US rate) in our view.

Impact

Six key reasons to be positive on Hong Kong developers. We see goodinvestment opportunities in HK developers as the HK residential marketrecovers. We expect market sentiment to continue to improve. We think thesix key positives are: 1) HK mortgage rate cut for the fourth time so far thisyear; 2) a change in US interest rate hike expectation due to Brexit; 3) amodest improvement in HK GDP and economy; 4) stabilization of HK physicalresidential market; 5) a deceleration in the decline of tourist arrivals, and; 6)SZHK Connect in November 2016.

Sufficient liquidity in aggregate balance (interbank liquidity). As of 23October, the aggregate balance in HK amounted to HK$260bn and remainsabundant. The USD/HKD FX rate stays on the strong side at 7.7585. Webelieve this liquidity is from 1) QE side (global capital flow); and 2) capitaloutflow from China (due to anticipation of RMB depreciation).

2017 property price to go up 5%. Property prices have risen 9.3% since July2016 (YTD: +3.4%). Looking into 2017, we expect a stable property marketwith limited policy risk and prices going up 5% in 2017E, mostly in mid/highendsegment, and primary volume going up 15% and 10% in 2017 and 2018,respectively. We expect overall monthly volume should be sustainable at ~5klevels, given the return of several types of buyers.

Outlook

We reiterate our positive view on HK developers. Our picks are Sun Hung KaiProperties (16 HK), New World Dev (17 HK) and CK Property (1113 HK).