Hong Kong Property:Outperformance like in 2012

We expect 2014 to mimic 2012 as HSP outperforms the Hang Seng Index, driven by strong volume, rising property prices, and limited risk of interest rate increases. Supply-demand remains favorable.

    HK developers are attractively valued for the past 18 months, averaging around 40% discount to NAV.This was justified based on an imminent rise in US interest rate (and thus HK mortgage rate) and a stringent regulatory regime to control the property prices.

    Why are we bullish? However, property prices are up 4% YTD (instead of the consensus expectation of 20% decline). In the past nine months, the volume of primary units has almost doubled, and prices are higher than we expected. On top of that, the expected timeline for an interest rate hike in the US has been pushed out, and regulation has been benign at best. This provided a perfect backdrop for discount to NAV to narrow.

    Residential Outlook and Stock picks – We now expect HK residential property prices to go up by 5% in each of 2014 and 2015, which is at the high end of Street estimates. We upgrade Sino to OW and NWD to EW, and we prefer SHKP, CK and Sino, in that order.

    Office rental outlook and stock picks – We expect office rental to increase by 5% in each of 2014 and 2015. We continue to prefer HK Land and SHKP.Demand-supply is favorable, and we have seen IFC2 registering HK$145 psf rental recently (30%+ higher than the bottom in 3Q12).

    Retail rental outlook and stock picks – We expect retail rental to remain flat this year but decline by 5% in 2015. We see a challenging outlook for Wharf, Hysan and Link REIT.

    Changes to PTs: We raise our PTs for developers by 9-41% to reflect a better residential market outlook. We raise our PTs for landlords by 1-14% to reflect our positive view of 2015 office rental, partially negated by our lowered forecasts for retail rental.