We favor investors for 2013 as concerns of
continued policy action, slow sell-through and
increased competition will keep the lid on NAV
accretion for developers. We now prefer office
rental exposure most and expect rents to rise by
10% in 2013.
Why Office? While we think liquidity should help the
property sector in general, office rental and related stock
prices could outperform most. Office rental could rise by
another 10% in 2013, driven by improving capital
markets, forecast rebound in HK GDP estimates (1.2%
in 2012 to 3.8% in 2013), low supply, and resilient
unemployment level. We think retail rental should also
increase despite slower retail sales in 2H12, driven by
low supply and addition of newer brands.
What’s Changed? We expect office rental/retail rental
and residential prices to rise by +10%/+5%/+5%,
respectively. The cap rate has been reduced by 25 bps
to 4.75% for office and 5.75% for retail. We upgrade HK
Land to OW, Swire Pacific to EW. We downgrade MTRC
and Hysan to EW.
Stock picking: We now prefer HK Land, CK and SHKP
in that order. HK Land is trading at 0.70x 2012 PB
(average is 0.83x) and should benefit from Central rents
bottoming. SHKP has 24% exposure to HK office and
should show a significant increase in market share (from
1.3k units to 3k units) for residential project in 2013. CK
will provide more than 40% of all new units in the market
in 2013, and should see a meaningful contribution (more
than 30% of earnings) from China’s residential market.