Hong Kong property market faces a downturn in 2012, but
all signs point to a moderate one
 We expect Hong Kong property capital values to fall
12-30%, owing to rising yields and affordability constraints
 We believe this downcycle is already largely priced in; our
preferred picks are SHKP and Henderson Land
Headwinds rising, but downturn should be moderate. The property market faces a
downturn in 2012, but it is unlikely to be anywhere near as severe as in the late-1990s.
With the economy set to skirt recession, we expect home prices to fall 15% in 2012,
while property yields rise and affordability begins to look stretched. All told, we
expect a moderate downturn, barring a recession, supply shocks or spiking rates.
More pressure on Central office market, less on retail. In the Hong Kong office
sector, we expect Central rents to fall 14% in 2012, restoring affordability amid macro
uncertainties, while Central office capital values should see a steeper fall of 30%. By
contrast, overall Grade A office and retail rents should show resilience in 2012, with
the former expected to fall 4% and the latter expected to rise 5%.
Qualities that help companies weather the challenges. Amid operating challenges
and uncertain credit conditions, we prefer firms with a high level of financial flexibility
gained from: 1) mass residential exposure; 2) a strong sales record in downturns;
3) steady rental income; and 4) a strong financial position.
Upgrade HK Land to Neutral; prefer SHKP and Henderson Land. We cut our
target prices by 19% on average, lowering NAV estimates (-15%) and widening NAV
discounts (+4%) to reflect the expected downturn. We upgrade HK Land from
Underweight to Neutral on valuation. Taking into account the four qualities outlined
above and valuation, our preferred picks are SHKP and Henderson Land. SHKP has a
lower risk-reward profile, while we see substantial re-rating potential for Henderson
Land (HLD), our anti-consensus pick, should HLD succeed in recovering market share.
With this note, Perveen Wong assumes primary coverage of SHKP, Sino Land, Hang
Lung Properties, Hysan, Champion REIT and HK Land.
Back to the 1990s? Unlikely 6
Executive summary 6
Better positioned than in
previous cycles 9
1. Recession unlikely 9
2. Supply shocks unlikely 10
3. Interest rates to stay low 10
Hong Kong residential: going
gets tough 13
Hong Kong office: challenged
by affordability and cap rate
expansion 18
Under the weather 18
Industry risks 23
An absence of a 2H12 economic rebound 23
Qualities to weather the downturn 24
Company Section 29
Henderson Land (12 HK) 30
Sun Hung Kai Properties (16 HK) 33
Sino Land (83 HK) 36
Hang Lung Properties (101 HK) 39
Kerry Properties (683 HK) 42
Hysan Development (14 HK) 45
Hongkong Land (HKL SP) 48
Champion REIT (2778 HK) 51
The Link REIT (823 HK) 54
Appendix 57
Disclosure appendix 64
Disclaimer 67