We believe the improvements in transaction volume and property
prices year to date have been driven largely by excess liquidity from
China and higher discounts in the primary market. Any normalisation
in China lending to focus more on real investment is likely to crowd out
liquidity in Hong Kong’s property market. China’s new loan increases
started to slow in April.
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The movement in property prices is best explained by the local GDP
growth and household income changes, which are both heading south
for the time being, despite the turnaround in sentiment. We expect
Hong Kong’s unemployment rate to reach 7% in 2009 from 5.2%, and to
remain the main drag on local property prices.
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Based on our affordability model and our forecast of a 7%
unemployment rate, we believe property prices still have 30% further
downside risk from the current level. However, we believe the tight
supply situation and strong liquidity in the system are likely to limit
downside to only 15% in 2009.
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We believe that most property stocks imply more than a 30% rise in
property prices. In our view, the strong run (up an average of 79% from
their troughs) in property stocks has not been matched by fundamental
improvements (income growth). We downgrade Kerry Properties and
Sino Land to UNDERPERFORM from Neutral and downgrade Cheung
Kong, SHKP and Swire to NEUTRAL from Outperform.