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Turnkey
Unaffordable Hong Kong
Event
We provide an update of our view on the outlook for the Asia-Pacific Real
Estate sector and use our theoretical portfolio to demonstrate our preferences
across the region. The big change recently was to move from Overweight to
Underweight on the Hong Kong Developers as affordability is rapidly
deteriorating due to strong price rises and interest rate increases. This has led
to further government intervention with growing support to address the
undersupply situation.
Impact
Market rightly concerned by deteriorating Hong Kong affordability. The
Hong Kong physical market has recorded a strong price performance YTD,
with prices up +13.5%; however primary and secondary volumes CYTD have
fallen significantly. Transaction volumes have fallen as consumer sentiment
has been negatively impacted by Government policy and interest rate rises.
Hong Kong has seen a rapid deterioration in affordability and we expect a
further deterioration in affordability as interest rates rise. Affordability based
on the overall private household after tax income is at 62%, 400bps above the
historical average of 58%. The house price to after tax household income is
currently ~17.0x well above the long-run average of 11.2x.
Furthermore, concerns of additional Government intervention will be raised if
prices continue to rise and affordability continues to deteriorate. Hong Kong
property trading multiples would appear to be reflecting the expectations of
tougher trading conditions ahead, with the overall MSCI Hong Kong Real
Estate 12-month forward PER at 12.99x against a long-run average of 14.23x
and the P/BV at 0.94x against a long-run average of 1.06x.
Regional portfolio: Overweight China, Singapore and Hong Kong
Overweight: China, Hong Kong Landlords, Singapore Landlords, the
Philippines and Indonesia.
Underweight: Hong Kong Developers, Singapore Developers, Japan,
Australia and New Zealand.
Hong Kong & China net upgrades. The earnings revision ratio remained
weak with net downgrades at 0.72x. While Hong Kong and China saw net
upgrades these were more than offset by net downgrades from Japan,
Australia, India and Singapore. However, consensus earnings growth
forecasts for FY11 accelerated in June to 11.0% from 3.65% in May.
Trading multiples below long-run average. June was a surprising month for
the MSCI Asia ex-Japan Real Estate Index, which was down -3.98% and
underperformed the broader market. The cumulative underperformance of
real estate within the MSCI Asia ex-Japan is now ~661bps CYTD. The 12-
month forward PER for MSCI Asia ex-Japan real estate fell in June to
~11.54x, which is well below the long-run average of ~14.76x. The sector is
currently trading at a price to book value of 1.06x, marginally below the longrun
average of 1.12x. The sector P/CF ratio continued to improve in June to
12.63x, down from 16.50x in January and is now well below the long-run
average of 15.92x.
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