Hong Kong Property:Time to get bullish?

Event

Centaline Research Associate Director Wong Leung Sing expressed apositive tone on the HK property market at a lunch hosted by Macquarie,projecting prices to rise another 20% in the next 12-18 months (YTD +1.0%).

Mr Wong thinks the growth momentum has been kicked started in 1Q17 andbelieves it will be inflation-led property price growth. Upcoming rate hikes inthe US will lead to global capital allocation flowing to both the US and HK,given the pegged USD/HKD exchange rate. He also shared three key viewson affordability, policy and source of demand.

Impact

Centaline view of the HK property market. Mr Wong expects 1) propertyprices to rise another 20% in the coming 12-18 months; 2) primary sales tostay robust and further increase from HK$185bn in 2016 to ~HK$200bn in2017E; 3) secondary transaction volume to stay low at around ~3k level.

Centaline view on US interest rate hikes. His house view is that US interestrate hikes will not stop property price rises. The core rationale of rate hikes isattributed to US economic strength and higher inflation. HK will benefit fromfund inflows given its exchange rate is pegged to the USD. This should alsobenefit Hong Kong’s economic growth. We are more conservative on this lastpart of the argument.

Takeaway 1 – Savings driven affordability, not income. Mr Wong viewsthe purchasing power of HK property investors as being backed by householdsavings, rather than income affordability. This phenomenon applies to severalcountries in Asia, including China, Korea and Japan. While the affordabilityratio looks relatively high in HK, he believes it has less impact compared towestern countries given their lower savings ratios.

Takeaway 2 – Policy fatigue in Hong Kong. Centaline believes policycooling measures are becoming ineffective after several rounds by thegovernment. While the policy successfully lowered transaction volumes, sideeffects are emerging. Insufficient units listed for sale (supply) in the market ledusers to pay a higher premium to buy apartments. The primary residentialmarket has been the key beneficiary of this scenario.

Takeaway 3 – Robust demand in luxury residential and commercialsegments. Luxury residential sales were strong in 2014-16, according toCentaline’s on-the-ground observations. Overall luxury residential sales hit arecord of HK$140bn in 2016, and Centaline projects a new high of HK$160bnin 2017. Separately, investors continue to flow towards the commercialsegment. Centaline expects total commercial transactions to grow fromHK$120bn in 2016 to HK$200bn in 2017

Macquarie’s view on HK property. We expect property prices to rise amodest 5% in 2017 on an abundance of liquidity (Fig 8), bucking the trend ofslow economic growth. We suggest investing in companies with growingrental income portfolios and good execution in asset enhancement initiatives(AEI). Those with more new commercial completions should deliver additionalrecurrent income and growth.

Outlook

We prefer residential to office with retail least preferred. Our picks are SHKP,New World and Link REIT.