From UOB-Kay Hian:-
Property
Limited upside to residential prices
After declining for more than three months, we expect residential activities will pick up this month, as developers’ promotional efforts on new launches have helped to lift market sentiment somewhat. Despite the falling volume, residential prices have only dropped 2% from the recent peak, supported by the negative rate and rising rental.
But given the uncertain economic situation overseas, we do not see much upside from the current level. Given this opinion, we recommend the laggards: New World Development (17 HK /BUY / Target: HK$26.09), Henderson Land (12 HK/BUY/HK$73.69) and Kerry Properties (683 HK/BUY / Target: HK$65.16).
Market activities picking up after four months of decline. Transaction volume fell further in April (which reflected slower residential activities in March), down 6% mom to 9,156, the third consecutive month of declining sales. Up to 16 May, 3,920 transactions were recorded, hence it is likely that May will be another slow month.
However, a couple of new launches has brought attention back to the market, we expect sales activities to pick up this month but the numbers will be reflected in the June figure.
Better-than-expected presale of The Palazzo. Admittedly, Sino Land’s presale of The Palazzo (Shatin), with 800 of the total 1,375 units sold within two weeks for an average price of HK$9,000psf, were ahead of our expectations both in terms of volume and prices. But that has not changed our view on the residential sector – that prices are close to the peak this year, if they have not already reached there yet.
Another surprise was that investment demand for luxury units remains strong. Taken into account the age gap of the projects, The Palazzo is about 20% more expensive than the nearby Royal Ascot. We consider this as fair difference.
Watch out for Celestial Heights. The next important launch is Cheung Kong’s Celestial Heights (Homantin) which has been developed and marketed as a top-end project. Presale results will give us an indication as to whether high-end demand is as resilient as The Palazzo suggests and the
rate at which the 939 units are disposed of will shed light on how management views the market outlook. Cheung Kong bought the site at a record HK$9.4b in 2004, implying an all-in development cost of around HK$8,000psf. If Cheung Kong manages to achieve at least an average HK$12,000psf, development margin is high at 50%.
Hong Kong developers used to margin game. With a mature property market that offers limited new supply, property development is a margin game in Hong Kong. As both The Palazzo and Celestial Heights show, Hong Kong developers have mastered product packaging (in order to obtain premium prices) to a fine art.
In fact, this is one of the reasons why we have reservations on the Hong Kong developers’ foray into China where property development is more a volume game. For the same reason, we are more optimistic on their exposure in the major cities because the population is more affluent and can afford better designed and more expensive housing while such demand in the secondary cities is largely unproven. Expecting little upside to residential prices from current levels.
Residential prices have remained resilient despite the falling volume. According to Centaline’s index, residential prices have dropped only 2% from the recent peak, which was recorded in March. Negative rate and rising rental have served to support property values. However, given the
uncertainty economic situation overseas, which will impact this part of the world, we do not see much further upside on local residential prices this year.
BUY laggards. The share prices of listed developer have been range bound in the past month and we expect this trading pattern to largely persist in the coming months as residential prices move sideways. Since hitting bottom in mid-March, the share prices of developers have rebounded by 13% to 39%, but are still 17% to 34% below their peak reached in November.
Without a more bullish outlook on the sector, we recommend the laggards:
New World Development (17 HK/BUY/Target: HK$26.09) being the cheapest
blue chip developer; Henderson Land (12 HK/BUY/HK$73.69) for its strengthening recurrent income base through HK & China Gas and an expanding rental portfolio; and Kerry Properties (683 HK/BUY/Target: HK$65.16) for its high quality landbank in Hong Kong and China.