Hong Kong:Key takeaways from luncheon with Dr.Jacinto Tong Man Leung
HK residential prices to decline by up to 10% in 2017 on ample new supplyWe hosted an investor luncheon with Dr Jacinto Tong Man Leung, Vicechairmanand CEO of property investor Galewell Group. In short, Dr Tongexpects Hong Kong residential prices to decline by up to 10% in 2017 on theback of ample new supply, where there are a total of about 33,000 unitsavailable for sale in the primary market or double the number of primarytransactions achieved in 2016. First-time buyers are in a more favorableposition in such a market. Meanwhile, he expects there may be scope for thegovernment to lower the Double Stamp Duty should there be clearer signsconfirming that the market is on a downtrend.
Primary supply as much as 33,000 units in 2017, putting a cap on pricingThe introduction of the administrative tightening measure last Nov (i.e., DoubleStamp Duty raised to 15%) effectively ruined developers’ project launchschedule in 4Q16, where there were a total of 12,000 units scheduled to belaunched originally. Consequently, this pent-up supply has carried forward andboosted total primary supply to 33,000 units in 2017. On the back of amplenew supply, developers are more desperate to launch their units earlier thanusual, with three projects having already been launched since the beginning ofthe year (i.e., developers would mostly focus on selling left-over inventory inprevious launches versus launching new projects before Chinese New year).
Scope for government to lower Double Stamp Duty if downturn is confirmedWhile Dr Tong believes the chance of the government removing all the currentadministrative measures is low, he reckons that there is scope to lower DoubleStamp Duty (specifically, from 15% currently to 7.5%) should there be moresigns confirming a cyclical downturn. Moreover, he believes there is alsoscope for the Hong Kong Monetary Authority to loosen on mortgage tighteningmeasures where the measures are counter-cyclical in nature. Meanwhile, DrTong believes that overall policy direction towards the property market will belargely similar whoever is going to be the next Chief Executive.
Expect residential prices to decline by up to 10% in 2017 but at a gradual paceOn the back of more unfavorable factors including interest rate hike, amplenew supply and Chinese demand weakening incrementally following therecent tightening in capital control, Dr Tong expects HK residential prices tofall gradually in 2017 by up to 10%. In particular, he expects ample new supplyto put a cap on pricing as competition intensifies in the primary market. Headded that if the ample new supply is not handled well (i.e., if developersundercut each other), this may well be a trigger for steeper price correction.
Look for better entry point in the sector as it approaches closer to “-1SD”In the cyclical downturn in 1998-2003, share price rallies typically lasted six toeight months, with cumulative share price performance ranging from +48% to+68% over the period. Following the end of an eight-month sector rally duringMar-Oct-16 and a sector-wide sell-down after the government introduced anew administrative tightening measure in early Nov, the sector is now tradingjust below the average discount to NAV. In our view, given a lack of near-termcatalysts, a better entry point to the sector is when discounts to NAV approach“-1SD”. We maintain our preference for developers over landlords, with CKProperty being our top pick.
