Hong Kong Property:Invasion by the public

Event

    We remain cautious on HK Property. Apart from rising policy risks anddeteriorating relationship between HK and China (Finger on the policy trigger 2October 2014), a new dampening factor should soon emerge: a resumption ofsales of public housing. The launch of 2,160 Home Ownership Scheme (HOS)units next month priced at a 30% discount to market (HK$1.9m to HK$3.2m orHK$5-6k psf) will likely divert some demand from the private residential market.

    The supply of revHOS units should continue to increase to around 4k unitsper year in 2015 and 2016, and eventually toward 8k units per year in 10years. If the government’s target materializes, HOS could potentially accountfor 30% of total for-sale supply from less than 15% in 2014.§ The projects which will be affected the most are those selling at belowHK$6m/unit. So far this year, Henderson Land (12 HK, HK$51.95,Underperform, TP: HK$48.17) and New World Development (17 HK,HK$9.55, Neutral, TP: HK$10.28) are the property sellers in this segment.

    Impact

    We estimate about 15% (by value) of the private primary market demand(based on L10M transaction) overlaps with that of the new HOS when usingthe maximum household income criteria of HK$46k/month. Average price perunit in the primary market was HK$10.7m, up 26% versus 2013. In terms ofvalue, the percentage of transactions done below HK$7m was 24% (27% in2013) and we estimate those below HK$6m was about 15%.

    For the next 10 years, according to the Policy Address in January 2014, targetis to supply 470k units, comprising of 200k Public Rental Housing (PRH)units, 80k HOS units and 190k private residential units. Target by 2017 is toachieve 20k PRH plus HOS units per year and, by 2022, 25k PRH plus HOSunits per year, versus 15-20k private residential units, according to ourestimate. There will be more options available for potential home buyers.

    Due to a shortage of supply last 10 years, unmet underlying demand hasaccumulated to 168k, based on the difference between marriage andresidential completion. Such figure has already excluded the external demandof new immigrants, which include 23k of people approved under the CapitalInvestment Entrant Scheme since 2003. However, we take a negative view onthis shortage of supply as the authorities need to continue to depend ondemand-side cooling measures over the next three years.

    Outlook

    We believe CY Leung will switch his focus back to housing after thesettlement of Occupy Central. Property prices have gone up close to 9% YTD.If unfettered, market sentiment may heat up again and it will be more difficultto cool it down when a consensus price growth momentum is re-established.Thus, we believe the timing of more policies should be before his PolicySpeech in January. The easiest measures to tighten are debt servicing ratio,loan-to-value ratio and mortgage tenure.

    The sector is currently trading at 35% discount to NAV, 12.3x 2015E PE and0.66x PB. We expect 5% drop in physical price in 2015.