[20081114]2009 Hong Kong Property Market Outlook: Too Early to Call the Bottom maintain, property, rating, office, recent

yangruoxin

Key points:
◆ NAV and TP downgrade on property sector.  Upon revising down our residential prices, office rental and retail rental forecasts, we downgrade our rating on SHKP (16.HK) to REDUCE, maintain Henderson Land (12.HK) at HOLD and initiate coverage on Sino Land (83.HK) with REDUCE.
◆ Pair trade idea. We suggest investors take the recent opportunity to trim positions in SHKP and Sino Land, and switch to Henderson Land as we expect it to outperform. 
◆ Not an ice age, but surely winter.  Financial woes around the globe intensified the correction of the domestic housing market.  Centaline’s CCL index has just reached its YTD low at 61.6, down 17% from the peak in March this year.  Such abrupt correction has more than wiped out all the gain throughout early 2008.
◆ Residential prices expected to fall an additional 28% until end-2010.  Major negatives are expected to come from: 1) continuing deterioration of the domestic economy, as revealed by higher unemployment and lower income growth; 2) mortgage rates in Hong Kong are now upward biased despite a recent cut in prime rate; 3) negative real interest rate, which acted as one of the key driving forces behind rising property prices since 4Q07, will reverse its course; 4) the expiry of deferred payment scheme for presold flats in 2006~2007 is a time bomb of sorts which may lead to frantic disposal of units from speculators.
◆ Although some positive factors such as persistently low primary completion and high homebuyer affordability remain intact, we do not expect these factors to keep homes prices immune from further correction in the wake of the unresolved financial crisis and its aftermath within the economy.
◆ The argument of limited primary supply in the next few years, which has been the market’s most often cited positive, does not hold.  We argue that the slackened take-up of primary units due to the weakened economy will continue to restrain residential prices.
◆ Rapidly worsening economic situation will also serve as drag on office and retail leasing activities.  As Central office rental rates peaked in 3Q08, we expect them to fall 35% over the next two years.  We also expect retail rentals to drop 20% in two years’ time.
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