Hong Kong Property:Well Wellpositioned weather changes
What's new
The results announced by severalproperty companies recently suggestto us that the fundamental strengthsof Hong Kong property companieshave probably never been better.Recurrent earnings are at recordlevels, net gearing is falling, and theinvestments in China since the mid-2000s have started paying off. Thisshould put Hong Kong propertycompanies in a good position to faceadverse economic developments andtake advantage of any newopportunities, in our view.
What's the impact
Office sector’s outlook generallyupbeat, with Hongkong Land’smanagement saying that, “strongprospects of the commercialproperty sector are expected tocontinue.” While the reported officerental of various property companieshas gone up by only 3.8% YoY onaverage, we think this is mainlybecause buildings in Central are stillrenewing high-rent leases negotiatedin the last peak of 2010-11.We note that occupancy in themarket has picked up across theboard in various portfolios, and thatthe asking rent in Citibank Plaza hasrisen. Such a backdrop should bodewell for the prospects of furtherimprovement in office rent in thecoming years, in our view.
Retail sales have fallen in a numberof portfolios but retail rent has heldup so far. The average Hong Kongretail rental rose by 7% YoY in 1H15for the basket of companies wetrack. We think this reflects thatmany tenants are still profitable andthat retail landlords in Hong Kongoccupy a very favourable position inthe industry. Moreover, localconsumption appears to be holdingup so far (various malls that focus onlocal consumers, such as Cityplaza,Plaza Hollywood, etc. still showpositive YoY growth in tenant sales).
We expect headwinds in the retailsector to persist over the comingmonths, but we expect the burden ofrental correction to fall more onhigh-street shops and less wellmanagedmalls. We also expectsuburban malls with improvingmanagement to get a larger share ofHong Kong’s retail pie.
Property sales profits have alsobeen holding up in the basket ofproperty companies we track (seepg. 2), and a few of these haveshown an expansion in profitmargin, despite various governmentmeasures introduced since 2011 tosuppress demand. We think thisshows that the primary market hassucceeded in eating into the marketshare of the secondary market andthat the change by developers tomainly build small units has beenaccepted by buyers.
China earnings continue to comethrough. The Hong Kongcompanies’ China rental income hasgenerally held up well, rising by17.1% on average, and a few of themhave surpassed the HKD1bn markon a half-yearly basis, (see pg. 2),notwithstanding the overall softoperating environment. Moreover,some Hong Kong players havereported an improvement in Chinaproperty sales’ profits, suggesting tous that some of them have madeprogress in terms of learning ways tomake money in the China propertyindustry.
Gearing remains low and dividendlooks either stable or on the rise.Nearly all companies have reporteda fall in their net gearing ratios andtheir dividends have either remainedthe same or increased.
What we recommend
We reaffirm our Positive rating onthe Hong Kong property sector. Ourtop picks among property investorsare Swire Properties (1972 HK,HKD21.55, Buy [1]) and HongkongLand (HKL SP, USD6.75, Buy [1]).Our top picks among developers areHenderson Land (12 HK, HKD46.1,Buy [1]) and SHKP (16 HK,HKD97.7, Buy [1]). Between the two,we still prefer investors. Key risk: adeterioration in the HK economy.
How we differ。
We believe that the Hong Kongproperty sector has merely beenundergoing an adjustment after astrong run. Our read is that theoffice sector has come out of italready and that adjustment in othersegments has also been ongoing forquite some time. This, however, hasyet to be fully discounted by themarket.