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Even Hong Kong property bears are bullish on real estate stocks


[HONG KONG] These days, Jonas Kan divides his time between forecasting how far Hong Kong property prices will fall, and how much real estate stocks will rise.

While home prices are poised to fall as much as 10 per cent by the middle of 2016, Mr Kan reckons, publicly-traded shares have baked that in and more.

The analyst at Daiwa Securities Group Inc's Hong Kong unit sees the stocks rallying at least 20 per cent over the next year.

With Sun Hung Kai Properties Ltd and its peers all trading at valuations below the global average, Mr Kan says as long as the property market cools rather than crashes, there's plenty of room for stocks to rally.

"This kind of discount you can't find anywhere in global property," said Mr Kan, whose calls over the past three months delivered almost twice the gains of the average strategist tracked by Bloomberg.

"In the past, when the actual decline in prices turned out not as large as the stock market has discounted, share prices usually do quite well after that." He's not the only analyst who's bullish: price targets compiled by Bloomberg imply a 23 per cent average rally for Hong Kong's biggest developers and landlords in the next year.

That's with Bocom International Holdings Co, Barclays Plc and CLSA Ltd all forecasting a slump in residential prices amid concern about higher mortgage rates, increasing supply and China's economic slowdown.

The city's nine biggest real estate shares slid an average 8.4 per cent in 2015 through Wednesday, with Wharf Holdings Ltd leading declines.

Cheung Kong Property Holdings Ltd, which spun off in June, is down 30 per cent since then. A measure of property companies on the Hang Seng Index gained 1.4 per cent as of 9.53am in the city, with Sino Land Co and Cheung Kong Property leading the advance.

Investors have overreacted to fears of a plunge in home prices before, according to Mr Kan.

In 2013, the city's property stocks tumbled amid government efforts to curb house-price growth and as global financial markets braced for a reduction in stimulus from the Federal Reserve. The Hang Seng Properties Index climbed 7.2 per cent the following year as home-price declines projected by a long list of brokerages never materialised.

Bocom said Nov 17 it sees house prices dropping as much as 20 per cent in the next three to six months, while property adviser Colliers International predicts a 15 per cent slide next year. There's a 74 per cent chance that the Federal Reserve will increase rates in December, according to futures data compiled by Bloomberg.

With Hong Kong's currency pegged to the dollar, borrowing costs in the market track US rates.

"If it turns out the magnitude of correction is not as severe or doesn't last for that long, there will be an impact on share prices," said Kan. "They can move quite quickly."


Sam Le Cornu, who oversees about $3 billion in Asian equities at Macquarie Investment Management, says investors are right to be cautious.

The city's property prices have more than doubled since 2008 to become the world's most unaffordable, according to UBS Group AG. Supply is increasing, with the government projecting 86,000 units of housing to be available for sale in the next three to four years, and lawmakers have imposed restrictions including a purchase tax on non-residents.

"The demand side has peaked," said Mr Le Cornu. "Buyers from mainland China aren't buying it in the same volumes as they previously were."


Secondary private residential property prices dropped 3.9 per cent since peaking in September, according to an index published by broker Centaline Property Agency Ltd.

Mortgage loans approved in September slid by 12.3 per cent from the previous month to HK$21.1 billion, its third monthly decline, according to the Hong Kong Monetary Authority.

Transactions are also declining, while the city's home sellers at major estates are starting to cut prices, the Hong Kong Economic Times reported.

Hong Kong's real estate companies trade at an average 6.9 times reported earnings, compared with 9.9 times for the Hang Seng Index and 11.9 times for the Bloomberg World Real Estate Index.

"Although we are negative on the physical market outlook given the increased supply and high home prices, we remain positive on Hong Kong property stocks," Barclays analyst Paul Louie wrote in a report this month.

"The current valuation implied by stock prices already factor in a 12 to 23 percent asset price correction; we see scope for share prices to strengthen."

Morgan Stanley says attractive valuations are a reason to buy stocks including Cheung Kong Property, Wharf Holdings and Sun Hung Kai Properties, despite the analysts' view that home prices and retail rents are likely to fall.

"The outlook is not that positive because of the interest- rate hike, increase in supply and recent price cutting, giving an impression that correction is in progress," said Ben Kwong, a director at brokerage KGI Asia Ltd. "But it all depends on the share price. If they are down a lot and investors believe they already discounted a lot, they're going to be bargain hunting."