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Real Estate
China’s real estate sector still clouded by policy headwinds; players
with firm specific catalysts & solid recurrent income will outperform
HK property sales volume will take a breather while prices remain
firm, underpinned by negative real rates; buy on dips
High conviction call: SHKP (16 HK, OW, TP HKD171.8)
China property – 2010 recap
The China property market has experienced
several rounds of tightening in 2010, but the
property market has been indifferent to the
austerity measures announced, with Beijing and
Shanghai secondary prices up 2% and 7% in the
year to October.
There exists a tug-of-war between the government
and developers, with the government showing
little tolerance for further price inflation, as
underlined by the timing, frequency and nature of
the measures announced. Developers, on the other
hand, are anxious to recoup cash flows to alleviate
balance-sheet strains through active project
launches, resulting in robust sales – an indication
of strong market demand which may invite more
restrictive property measures.
2011 outlook
Headwinds persist
We think the developers’ dilemma of lowering
prices and taking a more passive land banking
approach (against the backdrop of new tightening
concerns) will persist in 2011, given the inherent
nature of the business model which requires fast
asset turnover. In our view, the rapid jump in
supply in 2011 could be a remedy, forcing market
players to sell projects at lower prices for the
much-needed cash that needs to be spent on
construction capital expenditure so as to meet
aggressive 2012 completion targets. The
combination of these factors will lead to more
notable declines in physical market property
prices, which hopefully will put an end to the
current tightening environment.
In term of sales volume, limitations on
households’ home purchases in 16 cities and noise
about direct price intervention are a doublewhammy to developers. According to Soufun,
new home sales volumes in Beijing and Shanghai
were down 38% and 17% m-o-m in October. In
spite of this, we believe the property measures
have not yet been fully reflected in the market.
We believe 1H11 will continue to be a
challenging period for developers as the follow-on
effects of policies filter through the system. In our
view, the restriction on the usage of pre-sale
proceeds may be imposed in more cities than the
existing three, namely Beijing, Chengdu and
Dalian. With more than 40% of developers’
capital coming from pre-sale proceeds, we would
not be surprised to see cash-strapped players pull
back on heavy construction capex in 2011,
leading to completion slippage in 2012. In our
view, a more sustainable property price recovery
will not come until 2H11.
Despite the cloudy physical market outlook in
1H11, we believe equity investors should revisit
the sector during the period, as shares tend to
rebound 4-9 months ahead of property price
recovery. We believe home purchase demand is
solid but the timing of purchases is highly
dependent on expectations of policy measures and
price trends. For investors currently looking for
exposure in the sector, we recommend stocks with
company-specific drivers and recurrent income,
such as Shui On Land.
HK property – 2010 recap
Recapping key events in 2010, the HK
government stunned the market by imposing a
special stamp duty of as high as 15% on
speculative deals with holding periods of 6
months or less, on the back of rapid residential
price growth of 18% in the first 10 months of
2010. The new levy has put a dent in near-term
market sentiment, with weekly secondary
residential volume in 35 estates slumping 80%
w-o-w immediately post-announcement. Home
prices, however, have seen little impact thus far.
2011 outlook
Maintain positive stance – volume
takes a breather but not price
With the latest measures announced on 19
November, we expect mass residential market
transactions to shrink 40-60% from present levels
through the lunar year holidays in February 2011,
followed by a ‘lunar year rebound’ in sales
volume. During periods of property tightening in
the past, we note that transaction volume
generally takes a breather over a period of 6-8
weeks. This time round, sales volume will take
longer to recover, as the measures were harsher
than expected.
Indeed, our breakeven analysis indicates that
home prices need to rise 24% and 16% in order to
offset the new levy based on investment horizons
of 6 months and 1 year, respectively.
Our view is that home prices will decline by 5-10%
before regaining upward momentum in 2Q11. The
combination of soaring inflation expectations, a
negative rate environment as well as spillover
demand from Chinese buyers will continue to
provide solid support to property prices. On this, we
recommend investors to buy on dips.
2011 high conviction idea
We have a preference for HK developers over
China developers, as risk/reward profiles in Hong
Kong are more attractive.
SHKP: better placed to weather the
storm
Based on our view that properties with price tags
of less than HKD3m will be most affected by the
special stamp duty, we think SHKP will be best
positioned to weather the storm, given the strong
sales pipeline in the luxury end of the residential
market, as well as a balanced development
property/investment property portfolio.
We estimate a luxury residential pipeline of ~1m
sqft GFA in 2011 to bring in some HKD12bn of
revenue if fully sold. Together with strong growth
in the commercial leasing market, SHKP is well
placed to capitalise on both residential sales and
the commercial leasing market as it is one of the
largest landlords in HK generating gross rental
income of over HKD11bn/year.
Valuation
We have an OW rating on SHKP with a target
price of HKD171.8, which is based on a 20%
premium to our 12-month forward NAV of
HKD143.2. Our target implies a potential return of
36%, including a dividend yield of 2.1%, over the
closing price of HKD128.4 as at 30 November.
Key downside risks to our rating are (1) faster-
and sharper-than-expected interest rate hikes, and
(2) delays in project launches or completions.
Winners from Chinese growth
Since 2005, China’s turbo-charged economy has
surged more than 150% in terms of nominal GDP.
During the same period, the property market has
been growing hand-in-hand, with average
residential prices in Beijing surging ~200%.
Shui On Land (0272 HK, OW(V),
HKD3.88, TP HKD4.70)
High-quality IP highly sought after
With China’s GDP expected to grow by 8.9% in
2011 (based on HSBC Economics estimates),
increasing maturity in the real estate market in
terms of product mix, and a more established
system for resident relocation, SOL’s high-quality
investment properties will be highly sought after,
allowing the company to generate high growth in
recurrent income and hence cash flow.
Furthermore, SOL’s exposure to commercial
property in turn offers protection against policy
risks such as bank credit tightening, lending rate
hikes and other austerity measures. Last but not
least, faster-than-expected relocation in Shanghai
is a key catalyst for the stock for substantial rerating in NAV, as the new relocation scheme
(introduced in end-2009) has thus far been
effective in shortening the process.
Valuation
We have an OW(V) rating and a target price of
HKD4.7, set at a 25% discount to our 12-month
forward NAV of HKD6.2. Our target price
implies a potential return of 24%, including a
dividend yield of 3.0%.
Risks
Key downside risks include (1) slippage in
development, (2) lower-than-expected ASP, and
(3) general execution and business risks.
Most at risk
GZ R&F (2777 HK, UW(V), HKD10.32,
TP HKD9.4)
High debt level a key concern
GZ R&F’s high gearing has been a concern to us,
as a result of overly aggressive land acquisitions
in recent years. The company has seen its
repayment of borrowings exceed operating cash
inflow since 2008. In our view, recouping cash
from property sales and a temporary suspension of
land purchases is the best way to de-lever, but it
has become a challenging task in the wake of the
tightening measures.
Valuation
We have an UW(V) rating on GZ R&F with a
target price of HKD9.4, which is based on 50%
discount to our 12-month forward NAV of
HKD18.8. The steep NAV discount is applied
given the concerns stated above and based on
average trading range during the previous
downcycle in 2008. Our target implies a potential
return of -7%, including a dividend yield of 2.2%.
Risks
Key risks include: (1) stronger-than-expected
contracted sales and completions and (2) looserthan-expected political environment targeting the
property sector.
Key beneficiary of low rates
Cap rates of investment properties in Hong Kong
have been hovering at historical low levels,
benefiting landlords of commercial properties in
terms of valuation uplift as well as REITs
generating DPU yields well above the HKMA 10-
year note.
Link REIT: more juice from AEI; yield
spread still attractive (823 HK, OW,
HKD24.35, HKD28.5)
Link REIT’s internal growth story (through asset
enhancement initiatives and rental mark-ups) is
intact over the next 2-3 years, with c40% of IFA
expiring in 2H11 and FY12, presenting a
tremendous opportunity to raise rents on the back
of strong retail sales. In addition to growth from
mark to market of existing leases, the existing
AEI pipeline will take five years to exhaust,
assuming the historical project completion run
rate of around six properties per annum holds.
Based on our estimated ROI of 26% (historical
average ROI) for the 28 retail properties that have
not yet gone through substantial enhancement
works, we estimate the incremental NPI to be
HKD601m. In aggregate, we estimate an NPI
uplift of HKD1bn upon completion of all
enhancement works at the top 50 properties.
Valuation
We have an OW rating on Link REIT with a
target price of HKD28.5, which is based on a
yield of 4.2% and our FY11/12 DPU estimate of
HKD1.2/unit. We believe the DPU yield spread
above the HKMA 10-year note of 189bp is still
attractive. Our target price implies a potential
return of 21%, including a dividend yield of 4.4%.
Risks
Key risks include (1) political/social issues such
as protests against rent rises, (2) delays in AEI
projects and (3) a softer-than-expected retail
property market.
Most at risk
HKL: Fundamentally sound but
valuation stretched (HKL SP, UW,
USD6.78, USD5.7)
With the largest market share in the Grade-A
office market in Central, HKL by default is the
key beneficiary of the low cap rate environment
as well as robust rental recovery cycle. While the
Central office market recovery will carry through
2011 due to tight availability and a robust owneroccupier market, HKL shares are up 51% since
May 2010, trading at a 4% premium to our NAV
estimate. Hence, in spite of sound fundamentals,
we believe HKL’s valuation is stretched and see
higher downside risks for the stock.
Valuation
We have an UW rating on HKL. The company is
trading at 1.1x our 2011e BV, which is the peak
since 1994 and well above the mid-cycle PB
range of 0.75x since 1990. Our target price for
HKL is USD5.7, based on a 15% discount to our
NAV estimate of USD6.8. Our target implies a
potential return of -15%, including a dividend
yield of 2.4%.
Risks
Key upside risks to our UW rating include a
stronger and faster-than-expected recovery in the
office leasing market.
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