Hong Kong Real Estate:Don’t read too much in volume pick up amid skew to small-ticket units and unce

2Q volume recovered from low levels butpace of price correction has slowedApril & May’s avg. resi volume of 4,526 units was up136% vs. in 1Q16 (a 15-year low), buoyed byseasonality and developers offering financingincentives. However, the run rate was still -1% yoyand -36% vs. past 20-yr. average. Since late Mar, thepace of price correction has slowed (-4.8% ‘16 YTD,or 11.9% below Sep-15 peak), likely partly driven bymarket expectations of a slower rate hike pace.

    Macro uncertainty could dent near-termbuyer sentiment & drive market bifurcation;medium term depends on rate expectationsOver the weekend post the UK referendum, top-10estates saw only 5 transactions in the secondarymarket, a 20-week low. As uncertain macro likelyimpacts upgraders/investors’ sentiment morethan first-time buyers’, we expect the HK housingmarket to continue to bifurcate, skewed to smallticket and ultra high premium. We think highprices & low vol. will persist in the resi sectoramid low leverage for developers/individualswhile the macro uncertainty may keep lowmortgage rates for longer —our macro team hasshifted from 2 Fed rate hikes in 2016 to just 1.

    Favour office landlords for relativedefensiveness and CKP among developersWe favour the relatively more defensive officeproperty segment (Buy on Swire Prop and HKLand)for tight supply, low vacancies, and positive net takeupYTD. We see companies with strong balancesheets as the best positioned to capture landbanking/M&A opportunities, and forecast CKP (CLBuy)and Sino Land (Neutral) will be nearly net cashas of 2016E. Separately, in our analysis of historicalstock performance during gradual residentialcorrection cycles, CK/CKP and HLP (Buy) have bettertrack records of index outperformance vs. peers.