Morningstar | Hong Kong residential Market Finding its Footing Again, but Risks Remaining
The ever-volatile residential property market in Hong Kong seems to have found its footing again. With the consensus view of a dovish Fed over an increasingly longer time frame limiting interest-rate risk in Hong Kong, the market expects demand from local end users and continued influx of Chinese investors keeping the price steady for now. We still hold the view that the physical market is at a cyclical peak, factors such as poor affordability, tight rental yield, increasing supplies and the ongoing political unrest, amounting to significant risk. We believe developers with adequate sellable resources in the near term should benefit from the price rebound, and those with capability for farmland conversion and urban redevelopment should see higher margin.We maintain our fair value estimates for Hong Kong developers. At the current price level, we believe narrow-moat Sun Hung Kai Properties and narrow-moat CK Asset are undervalued, offering 15% and 25% upside, respectively. No-moat Henderson Land and no-moat Sino Land are fairly valued at this point.
After sustained decline during the last quarter of 2018, Centa-City Leading Index rallied in the first half of the year, largely making up the losses. Transaction volume in the secondary market rebounded somewhat as the price recovered. We expect the primary market to be the main beneficiary of the improving market sentiment.
Developers with large amounts of sellable resources in the pipeline should benefit in the near term. Sun Hung Kai Properties has over two million square feet gross floor area, or GFA, for launch in 2019, including the Victoria Harbour project and new phases of St Martin and Cullinan West projects. And to a lesser degree, Sino Land’s remaining stock at Grand Central and Mayfair should benefit from the trend as well, but its near-term pipeline is relatively small at half million square feet GFA. CK Asset has limited sellable resources at this point after achieving over HKD 50 billion in contract sales in 2018. Henderson Land has adequate sellable resources for 2019, though its earnings are going to be largely driven by asset disposal.
Henderson Land Development is an investment holding company, engaged in property development and investment in Hong Kong and mainland China, hotel operation, project and property management, construction and provision of finance. Co.'s segments include Property development, property leasing, construction, infrastructure, hotel operation, department store operation, utility and energy, and others. Co.'s others segment is involved in the provision of finance, investment holding, project management, property management, agency services, cleaning and security guard services, as well as the trading of building materials and disposal of leasehold land.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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