Hong Kong Property:Primary sales momentum set to slow on fewer new project launches ahead
Limited upside on the sector on expectation of a softening physical market
Despite a marked pick-up in primary sales volume over the past few weeks, we expect this strong momentum to slow down in coming months, on a lack of sizeable project launches ahead. For FY16, we still anticipate primary sales volume to decline YoY. Consequently, trading at a 33% discount to our NAV estimate, the Hong Kong property sector is mostly at the historical average seen in previous downturns and close to the valuation peak seen in short-lived rebounds in the previous cyclical downturn; thus we see limited further upside potential on the back of a softening physical market.
Primary volume/secondary volume still down by 20% YoY/31% in 8M16
According to Centaline, there were 8,229 primary transactions in 8M16, implying a 20% YoY decline and just 50% of total units sold in 2015. By considering the four-week time lag from sales to registration and tracking weekly primary sales volume as reported, we estimate that there would be 1,893 and 2,543 primary registrations in September and October, respectively. Hence, primary registration in 10M16 is expected to be 12,665, or 23% (3,772 units) below 2015’s volume of 16,437 units. In the secondary market, there were 19,642 registrations recorded in 8M16, implying a 31% YoY decline.
Only 1,672 units over six projects obtained pre-sales permit pending launch
While there are 18 major projects planned to be launched in the remaining months of 2016, only six projects amounting to 1,672 units have received the pre-sales permit pending launch so far, with Babington Hill (79 units) and Marina South (114 units) more likely to be launched in the near term. For 2016, to match the actual primary volume achieved in 2015, we need to have 1,886 primary registrations in each of November and December, which we believe is a stretched target in the absence of sizeable new project launches ahead.
Mild ASP/volume recovery not uncommon during cyclical downturns
Referencing previous cyclical downturns, the recent increase in sales momentum is not uncommon, as a result of the release of pent-up demand. Specifically, in the cyclical downturn during 1998-2003, there were seven short-lived rebounds (typically lasting for one to three months) in primary sales volume in which QoQ growth was above 30%. Correspondingly, the CCL index was up by 2-12% over these short-lived rebounds. However, softness in prices/rents resumes once such demand gets exhausted.
Limited upside following a seven-month rally/valuation close to cyclical peak
Referring to the share price rallies in the previous cyclical downturn in 1998-2003, these short-lived rallies have typically lasted for 6-8 months, with sector share price performance ranging from +48% to +68% over the period and discount to NAV peaking at about 24-25% (the rally in May-00 to Jan-01 saw NAV discount narrow to 13%). The rallies were supported by a corresponding strengthening in the physical property market. Following a 43% rally since the trough in Feb, we are seven months into the current rally and already at the historical average seen in previous downturns and close to the valuation peak seen in short-lived rebounds in the previous cyclical downturn.