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HK Residential: China growth
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Hong Kong residential overview: Pricey, and climbing
Hong Kong is one of the most vibrant residential markets in the world –and also
one of the most expensive (#7 globally as of Dec 2008). In the face of a global
recession, a local economy that declined 4.3% in 1Q09, and an unemployment
rate that increased over 100bp to 5.2%, HK residential prices have increased
13.3% YTD – and volumes have returned to their historical average.
Why the recovery? Influences from China
The main catalyst has been increased mortgage liquidity with competitive rates
(2.5% for Prime-based loans), which have improved debt service ratios to 42%,
well below the 25-year average of 63%. Additionally, housing starts averaged just
0.7x of household formations over the past 12 years. Finally, the HSI is up 20%
YTD, and historically the stock market has a 0.69 correlation with home prices.
BAS-ML Model: Prices +5% in 2009E, +5 to 10% in 2010E
Sentiment has improved, however, predicting investor sentiment and the direction
of the Hang Seng Index can be a circular argument. While we are cautious of
nominal home prices and increasing unemployment, we believe prices will
increase 5% during the remainder of ‘09, and 5-10% in ‘10. This view is based on
our BAS-ML Net Cost of Carry Model, which factors free cash flow to owners.
Dominant position in HK – but landbank quality crucial
HK developers have near-dominant market share (Top 7: 64%), as well as pricing
power, strong relationships, and balance sheets. However, we believe landbank
quality is crucial. Among HK developers, we rate SHKP’s landbank quality #1 in
China, and Hang Lung #1 in Hong Kong, weighing a set of important criteria.
Preferred: Sun Hung Kai over Cheung Kong
This report is released in conjunction with our reinstatement of coverage reports
on Sun Hung Kai (Buy rating) and Cheung Kong (Underperform). We prefer
SHKP due to its premier investment portfolio, development expertise, fortress
balance sheet, and high-quality reputation recognized locally and among wealthy
mainland Chinese.
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