􀀗 Narrowing rental decline and cap rate
compression are positives; we look for
rents to recover 0-10% in 2010
􀀗 However, we think the sector is fairly
valued trading at a mid-cycle 35%
discount to NAV
􀀗 We upgrade Hysan to N(V) from UW(V)
and maintain our N(V) on HKL and our
UW(V) on GE. We are OW(V) on REITs
Rental decline has narrowed; recovery to resume in 2010.
Central rents corrected 13.4% in 2Q09, deeper than our
expectation, but narrower than the 25% decline in 1Q09. With
surrender space of c530k sf still emerging, c300k sf of space
due for expiry or renewal, and net absorption still negative,
rents are set to drop further in 2H09. For the full year, we
forecast a decline of 40-50% (versus 30-35% previously),
but we expect positive growth of 0-10% in 2010.
Capital value appreciation under favourable macro
environment. Owing to the influx of ‘hot money’ (speculative
investment) and persistently low interest rates, we lower our
sector cap rate assumptions to 5% for office and 5.5% for retail
(from 6.5% and 7%). Accordingly, our sector NAVs are
revised up 4-29%. We contend that this is a direct result of
the overheated investment market rather than a full-fledged
recovery in the underlying rental market.
Current valuations appear fair. Narrowing rental declines
and cap rate compression are both positive for the sector;
however, we believe the landlords are already fairly valued
at a 35% discount to NAV. We therefore upgrade Hysan to
N(V) from UW(V) on valuation while we maintain our N(V)
on Hongkong Land, on stable dividend yield, as well as our
UW(V) on Great Eagle, on high exposure to hotel assets. We
are OW(V) on both C-REIT and Link REIT on stable and
sustainable DPU yields.