巴克莱资本房地产行业深度研究报告

巴克莱资本房地产行业深度研究报告EQUITYRESEARCH23NOVEMBER2010INITIATINGCOVERAGEHONGKONGPROPERTYDEVELOPERSHONGKONGPROPERTYDEVELOPERS1POSITIVEINITIATIONOFCOVERAGEBUBBLEWRAPFROMN/APOSITIVE6VIEWONHONGKONGPROPERTYDEVELOPERSALTHOUGHPROPERTYPRICESAREFORAFULLLISTOFOURRATINGS,PRICETARGETSANDEARNINGSINTHISREPORT,PLEASESEETABLEONALREADYOVERVALUEDAGAINSTLONGTERMFUNDAMENTALS,WEEXPECTTHEMTOOVERSHOOTPAGE2LOWSUPPLY,AGOVERNMENTUNWILLINGTODEFLATEHOUSEPRICES,NEGATIVEREALMORTGAGERATESANDHIGHLEVELSOFEQUITYAREALLSUPPORTIVEOFHIGHERPROPERTYPRICES,INOURHONGKONGPROPERTYINVESTORSVIEWWHILEALLEIGHTDEVELOPERSSHOULDBENEFIT,OUR1OVERWEIGHTPICKSSHKP,SINOANDREWLAWRENCELANDANDKERRYPROPERTIESREFLECTOURPREFERENCEFORSHORTERDURATIONLANDBANKS85229033319ANDTHEPRESELLINGOFDEVELOPMENTSIE,BUSINESSMODELSTHATCAPTURETHELATECYCLEANDREWLAWRENCEBARCAP4RETURNS,WHILEMANAGINGTHERISKSINHERENTINHONGKONGSVOLATILEPROPERTYPRICESBARCLAYSBANK,HONGKONGPROPEJONATHANHSURTYPRICEMOMENTUMREMAINSDESPITETHEGOVERNMENTSRECENTMEASURES,85229037STRONGHOMEBUYERCONFIDENCEWILLLIKELYALLOWPROPERTYPRICEMOMENTUMTORUNFORBARCLAYSBANK,HONGKONGANOTHER182VIEW8522903LOOKTOCAPTURELATECYCLERETURNSWHILERISINGPROPERTYPRICESAREPOSITIVEFORALLEIGHTBARCLAYSBANK,HONGKONGDEVELOPERS,OURPREFERENCEISFORSHKP,SINOLANDANDKERRY,COMPANIESFOCUSEDONPRESALES,WITHSHORTERDURATIONLANDBANKSANDAFOCUSONTHECASHRICHUPPERRUNGSOFTHEHOUSINGLADDERTOCAPTURETHERETURNSANDMANAGETHEINHERENTRISKSOFTHISSTAGEOFTHECYCLEOUR3UNDERWEIGHTRATINGONHANGLUNGPROPERTIESHLPREFLECTSTHEHIGHEXPECTATIONSPRICEDINTOTHESTOCKANDTHATINVESTORSHAVELARGELYIGNOREDTHEPOTENTIALLANDAPPRECIATIONTAXLATLIABILITIESOFITSCOMMERCIALPROPERTIESINCHINAUSANDCHINAINTERESTRATERISKSINTHENEARTERM,HIGHERINTERESTRATESINCHINA,DISCOURAGINGINVESTMENTFLOWSANDNEGATIVELYIMPACTINGCONFIDENCE,REMAINAKEYRISKYET,THELARGESTRISK,INOURVIEW,REMAINSUSINTERESTRATES,ESPECIALLYGIVENTHEINCREASEDMORTGAGEBORROWINGBYHOMEBUYERSWEBELIEVETHISINTERESTRATELINKANDINVESTORSENTIMENTWILLCONTINUETOTIEDEVELOPERSSTOCKPRICESTOUSDOLLARMOVEMENTSFIGURE1HONGKONGPROPERTYDEVELOPERSVALUATIONTABLEPRICEPOTENTIALHKRATINGPRICETARGETUP/DOWNSIDESINOLAND83HK1OW15VIEW1POS1POSITIVE2NEU2NEUTRAL3NEG3NEGATIVE23NOVEMBER20102BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSINVESTMENTSUMMARYWEINITIATECOVERAGEOFTHEHONGKONGPROPERTYDEVELOPERSWITHA1POSITIVESECTORVIEWSTRONGCONSUMERCONFIDENCE,NEGATIVEMORTGAGERATESANDTHEAVAILABILITYOFCREDITWILLLIKELYENCOURAGEDEMANDTOCHASEACONSTRAINEDSTOCKOFAVAILABLEPROPERTIESOVERTHENEXT182VIEWHOWEVER,WEBELIEVETHELONGERINTERESTRATESREMAINLOWANDHOUSEHOLDCONFIDENCEREMAINSSTRONG,THEGREATERTHEPROSPECTSOFAMOREMATERIALOVERSHOOTINPRICESNEGATIVEMORTGAGERATES,ABELIEFINTHERENEWEDINVESTMENTPOTENTIALOFHOUSINGANDCONFIDENCETHATPRICESCANRISEANDPANICTHATSUPPLYWILLNOTBEAVAILABLEINAFEWMONTHSTIMEWILLLIKELYALLOWTHECURRENTMOMENTUMINENDPRICESTORUNFORANOTHER18260,0006,00050,0005,00060OF2010SHOMEBUYERSWEREUPGRADERS,30WEREINVESTORSANDTHEREMAINDERWEREFIRSTTIMEBUYERSDESPITEALLTHEPOLITICALTALKABOUTFIRSTTIMEBUYERS,THEWIDENINGOFPRICESBETWEENRUNGSOFTHEHOUSINGLADDER,THEGREATERPROPORTIONOFHOUSEHOLDSAGED35608506600101,6002600,000500,000VIEWFIGURE9HOUSEPRICESANDHOUSEHOLDINCOMESINDEX60050060260300MONEYSUPPLY156058077076056010NEGATIVEREALMORTGAGERATESVIEWGIVENTHEINCREASINGADMINISTRATIVEMEASURESINCHINAONSECONDHOMEPURCHASES,HONGKONGCONTINUESTOREMAINARELATIVELYEASYDESTINATIONFORMAINLANDCAPITAL23NOVEMBER201011BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSHOUSINGDEMANDMODEL4FORECASTINGSHORTTERMRESIDENTIALPRICEPERFORMANCEISMOREDEPENDENTUPONCHANGESINDEMAND4TODETERMINEDEMANDANDDEMANDDRIVERS,WEUSEACONCEPTUALMODELBASEDUPONCHANGESINECONOMICANDSOCIALSENTIMENT4THEBASISOFOURMODELISTHATHONGKONGSRESIDENTIALDEMANDISLARGELYINVESTMENTDRIVENHIGHERPRICESINDUCEHIGHERDEMAND,ASTHEPOSITIVECORRELATIONBETWEENTURNOVERANDPRICESDEMONSTRATESFORECASTINGDEMANDFORECASTINGSHORTTERMRESIDENTIALPRICEPERFORMANCEISMOREDEPENDENTUPONCHANGESINDEMAND,INOURVIEWTHISISNOTTOSAYTHATSUPPLYISNOTIMPORTANT,BUTSIMPLYTORECOGNISETHEGREATERINFLUENCESUBTLESHIFTSINDEMANDCANEXERTONSHORTTERMPRICESETTINGOVERTHEINELASTICSUPPLYSIDEOFTHEMARKETDEMANDIMPROVESWHENANDETERMININGHOUSINGDEMANDISDIFFICULT,GIVENTHATDEMANDEMBODIESAWIDEVARIETYOFEXTERNALFACTORLEADSTOACHANGEECONOMICANDSOCIALFACTORSINORDERTOATTEMPTTOESTIMATETHENATUREANDDRIVERSOFINAFFORDABILITYANDCONFIDENCEHOUSINGDEMAND,WEUSEACONCEPTUALMODELBASEDUPONCHANGESINECONOMICANDSOCIALSENTIMENTOURMODELASSUMESACHANGEINTHEMARKETOCCURSWHENANIMPROVEMENTINEXTERNALECONOMICFACTORSLEADTOACHANGEINAFFORDABILITY/LIQUIDITYANDBUYERCONFIDENCETHEBASISOFTHEMODELISRELATIVELYSTRAIGHTFORWARDINSTABLEPERIODS,ENDBUYERSDOMINATEANDDEMANDISLARGELYDRIVENBYCHANGESINHOUSEHOLDCOMPOSITIONBIRTHS,DEATHS,MARRIAGES,DIVORCES,ETCTURNOVERISRELATIVELYLOW,ANDAFFORDABILITY,COMBINEDWITHHOUSEHOLDCONFIDENCEWITHREGARDTOEMPLOYMENTPROSPECTSANDTHEABILITYTOSERVICETHEMORTGAGE,ARETHEMAINDRIVERSTODEMAND,INOURVIEWHOWEVER,ASTHEECONOMYANDHOUSEHOLDCONFIDENCEIMPROVES,RISINGHOUSEPRICESARESEENASASIGNALTHATITISAGOODTIMETOTRADETHISENCOURAGESMOREFIRSTTIMEBUYERSINTOTHEPRIVATEHOUSINGMARKETANDEXISTINGPRIVATEHOUSEHOLDSTOUSETHEEQUITYINTHEIRHOMESTOTRADEUPASPRICESCONTINUETORISE,THEINVESTMENTMOTIVERETURNSANDANINCREASINGNUMBEROFINVESTORSENTERTHEMARKETTHISFORCESTURNOVERUPANDDRIVESPRICESHIGHERCONFIDENCEINRISINGPROPERTYPRICESANDTHEAVAILABILITYANDAFFORDABILITYOFCREDITBECOMETHEMAINDRIVERSOFDEMANDULTIMATELY,IFHOUSEPRICEINFLATIONREMAINSPERSISTENTLYHIGH,ITENCOURAGESASPECULATIVECULTURE,PROMPTINGPEOPLETOPAYMOREFORPROPERTYANDENCOURAGINGTHEMTOHOLDMORETHANTHEYNORMALLYWOULDTHEAVAILABILITYOFCREDITDOMINATESANDANINCREASINGBELIEFINTHEGREATERFOOLTHEORYSOMEONEWILLALWAYSPAYMOREDRIVESDEMANDTHIS,INOURVIEW,CAUSESHIGHERTURNOVERLEVELS,DRIVESAFFORDABILITYRATIOSTOUNSUSTAINABLELEVELSANDDISGUISESTHEREALDEMANDFORPROPERTYREFLECTINGTHEINVESTMENTASTHEFOLLOWINGGRAPHSSHOW,THISMODELVIACHANGESINTURNOVER,AFFORDABILITY,PRICETODRIVENDEMANDFORHONGKONGINCOMERATIOSANDPRICEVOLATILITYREFLECTSWELLTHESHIFTINGPATTERNOFMARGINALDEMANDINPROPERTYHONGKONGSHOUSINGMARKET,RESTINGONTHESIMPLETHESISTHATHONGKONGSRESIDENTIALDEMANDISLARGELYINVESTMENTDRIVENCHEAPERHOUSEPRICESANDIMPROVEDAFFORDABILITYDONOTINDUCEHIGHERDEMAND23NOVEMBER201012BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSFIGURE160INVESTMENT5060SPECULATION1060ENDUSERSENDUSERS609VIEW,THISREFLECTSEXPECTATIONSOFACONTINUEDPROPERTYECONOMICRECOVERYANDLOWUSINTERESTRATES,THEEXPECTATIONOFFURTHERPRICEINCREASESDUETOLIMITEDSUPPLY,CHEAPMORTGAGERATESANDMONEYFLOWFROMTHEMAINLAND,ANDAGOVERNMENTULTIMATELYUNWILLINGTOSIGNIFICANTLYDEFLATETHEPROPERTYMARKETHAVINGBEENDRIVENBYAFFORDABILITYANDTHEAVAILABILITYOFEQUITY,WEEXPECTTHEMAINDEMANDDRIVERSOFTHENEXTSTAGEOFTHEMARKETTOBETHEAVAILABILITYOFCREDIT,CONFIDENCETHATPRICESCANRISEANDPANICTHATSUPPLYWILLNOTBEAVAILABLEINAFEWMONTHSTIMEWHILERECENTGOVERNMENTMEASURESARELIKELYTOREDUCESPECULATIVEACTIVITY,WEVIEWTHEADDITIONAL5COSTOFHOLDINGPROPERTYFORMORETHAN12MONTHSASINEFFICIENTTOOFFSETTHERENEWEDINVESTMENTDEMANDFORPROPERTYFIRSTTIMEBUYERSANDTHEMASSMARKETDECLININGUNEMPLOYMENTANDINTHEMASSMARKET,BUYERCONFIDENCEWILLLIKELYIMPROVEONDECLININGUNEMPLOYMENTANDWAGEGROWTHWILLLIKELYDRIVEWAGEGROWTHTHECURRENTMONTHLYCOSTOFAREPAYMENTMORTGAGEONASTARTERUNITINTHEFIRSTTIMEBUYERCONFIDENCENEWTERRITORIESACCOUNTSFORONLY35OFTHEMEDIANHOUSEHOLDINCOMEANDISCOMPARABLETOTHECOSTOFRENTINGFORMONTHLYMORTGAGECOSTSTOREACH50OFHOUSEHOLDINCOMETHELIMITFORBANKLENDINGWOULDREQUIREMORTGAGERATESTOINCREASE60601600,136603678,208,675JUN982,607,660782,2981,825,362603,656,60,0581801,900,5373,656,60JUN093,006073,656,VIEW,CLEARLYIMPLYTHATTHERECENTREDUCTIONSINLTVRATIOSWILLLIKELYONLYHAVEAMARGINALEFFECTONUPGRADERDEMANDFIGURE27LTVREQUIREMENTSOFUPGRADERS160160VIEWLOWDEPOSITRATESAREPOSITIVELYENCOURAGINGTHECASHRICHINTOTHEPROPERTYMARKET,ASEVIDENCEDBYMORTGAGEGROWTHOUTSTRIPPINGDEPOSITGROWTHANDTHEHIGHLEVELOFTRANSACTIONVOLUMES,WHILEEXPECTEDRMBAPPRECIATIONHASENCOURAGEDSOMEINVESTORSTOBUYAHEADOFMAINLANDMONEYFLOWSHOUSINGINFLATIONISPERSUADINGPEOPLETOPAYMOREFORPROPERTYANDENCOURAGINGTHEMTOHOLDMORETHANTHEYNORMALLYWOULDFIGURE29DEPOSITANDMORTGAGELOANGROWTH50060UNITS,MARKEDLYLOWERTHANTHE6027,60722,060UNITS,2011S20MONTHPOTENTIALAVAILABILITYEQUATESTOONLY18XDEMAND,DEMONSTRATINGTHERELATIVELYLOWSUPPLYOVERTHENEXT12260112,160916,VIEWHOWEVER,WESUSPECTTHEOVERHANGOFTHETUNGADMINISTRATIONS85,000INOURVIEWUNITPOLICYLIKELYCONTINUESTOWEIGHHEAVILYONTHEGOVERNMENTSDECISIONMAKINGPROCESS,ANDTHEREFORE,WEBELIEVETHECURRENTADMINISTRATIONISUNWILLINGTOTAKETHENECESSARYMEASURESTODEFLATETHEHOUSINGMARKETFORDONALDTSANG,AMAJORCORRECTIONINRESIDENTIALPROPERTYPRICESATATIMEWHENHISGOVERNMENTISALREADYDEEPLYUNPOPULARWOULDLIKELYPROVEHIGHLYDAMAGINGTHISVIEWISREFLECTEDINTHENATUREOFADMINISTRATIVEMEASURESTAKENOVERTHEPAST12MONTHS1GIVENTHATBANKSWEREALREADYLENDINGATAROUND60LTVFORPROPERTIESOVERHK8MN,SIMPLYMOVEDTHEHKMASLENDINGGUIDANCEINLINEWITHMARKETPRACTICE2THETEMPORARYSUSPENSIONOFPROPERTYASAQUALIFYINGINVESTMENTUNDERTHECAPITALINVESTMENTENTRANTSCHEMECIESONLYAFFECTEDSOME23OFTOTALTURNOVERFORPROPERTIESWITHAPRICEOVERHK5MREFLECTINGTHEHK65MTHRESHOLDOFCIES,ANDIGNOREDTHEMAJORITYOFCAPITALINFLOWSTHATENTERTHEMARKETOUTSIDETHISSCHEME3THEINTRODUCTIONOFARENTTOBUYSCHEMEOFONLY5,000UNITSSUPPLYTOBEPROVIDEDFROM201VIEWOFHOUSINGNEEDSAND,INEFFECT,IMPLIESTHEGOVERNMENTWILLMOVETOSOMEFORMOFREGULARAUCTIONPROGRAMMEFORLANDSALESIN2011SHOULDDEVELOPERSNOTTRIGGERSUFFICIENTSITESOFFTHEAPPLICATIONLISTTHEGOVERNMENTSPROPOSEDTARGETOFANANNUALSUPPLYOF20,000PRIVATEUNITSAPPEARSCONSISTENTWITHOUROWNFORECASTSTHEGOVERNMENTHADALREADYSIGNALLEDITSINTENTTOINCREASELANDSUPPLYATTHESTARTOF2010,23NOVEMBER201026BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSTHROUGHENCOURAGINGFASTERDELIVERYOFLANDBYTHEMTRCANDURA,BECOMINGMOREACCOMMODATIVEINLANDCONVERSION,EASINGRESTRICTIONSONCOMPULSORYPURCHASEANDMOVINGTOREGULARLANDAUCTIONSCHANGESTOTHEBUILDINGCODETOREDUCEDEVELOPERSABILITYTO“INFLATE”THEGROSSFLOORAREAGFAHAVE,HOWEVER,HELDBACKSUPPLY,ITISNOWUNLIKELYTHEMTRCWILLTENDERBEFORETHESTARTOF2011WESEENOSIGNIFICANTRISEINTHEREVISEDLANDAPPLICATIONLIST,EXCLUDINGTHISYEARSLANDAUCTIONSANDADDINGBACKSITESNEARTERMSUPPLYALREADYIDENTIFIEDFORINCLUSION,NOWCONTAINSAROUND9,000UNITSTHEMTRCHASTHEPOTENTIALTOTENDEROUTSOME18,176UNITSOVERTHENEXTTWOYEARS,ESPECIALLYIFTHEGOVERNMENTSTIPULATESSIZEREQUIREMENTSFORUNITSTHEURAHASINTHEREGIONOF2,138UNITSOFLANDSUPPLYITCANTENDERTOGETHER,THISIMPLIESALANDSUPPLYPOTENTIALOF29,31602,778VIEWTHEGOVERNMENT,CONSISTENTWITHITSCURRENTLANDSUPPLYDESIRENOTTOCAUSEACORRECTIONINPRIVATEPRICES,ISCLEARLYTAKINGACAUTIOUSAPPROACHTOEXPANDINGTHESUPPLYSIDEOFTHEMARKETAND,THEREFORE,ITISLIKELYTOTAKESOMETIMETOREACHITS20,000UNITSPATARGETINADDITION,GIVENTHELARGESIZEOFSITESBEINGOFFEREDFORSALEONTHEAPPLICATIONLISTANDVIATHEMTRC/URA,CONTROLOVERSUPPLYSTILLREMAINSINTHEHANDSOFLARGEDEVELOPERS,UNLESSTHEGOVERNMENTISPREPAREDTOMATERIALLYDROPITSLANDPRICESORCHANGETHELANDPREMIUMPAYMENTSYSTEMFROMBEINGUPFRONTTOASTAGEDPAYMENTSYSTEMALTHOUGHKAITAKOFFERSTHETHATSAIDHOWEVER,WEAREOFTHEVIEWTHATIFPRICEINCREASESCONTINUEANDHOUSEPRICESAREPOTENTIALFORALARGESCALEMULTIUP1015BYMID2011,THENTHEGOVERNMENTWILLBECOMPELLEDTOMAKEAMOREPUBLICYEARSUPPLYDEMONSTRATIONOFITSCOMMITMENTTOINCREASEHOUSINGSUPPLYONEPOTENTIALCOULDBETHERELEASEOFKAITAK,THEOLDAIRPORTSITE,FORAMASSRESIDENTIALDEVELOPMENTOFAROUND30,000UNITSTOBEPROVIDEDVIASOMEFORMOFPUBLIC/PRIVATEJOINTVENTURE,THEFINANCIALSECRETARYHASALREADYHIGHLIGHTEDTHEPOTENTIALOFKAITAKTOPROVIDELONGTERMSUPPLYOTHERMEASURESAFURTHERRISKWESEETOTHEPROPERTYMARKETISTHATTHEGOVERNMENTBOWSTOPOLITICALPRESSUREANDRESTARTSTHEHOSDEVELOPMENT,WITHTHEPROSPECTOFAMATERIALINCREASEINENDSUPPLYALTHOUGH,THISWOULDSTILLTAKEFIVEYEARSTOMATERIALISEINTHEFORMOFCOMPLETEDUNITS,ITWOULDLIKELYBEDISRUPTIVETOTHEPRIVATEMARKETANDCONFUSETHEOUTLOOKFORFUTURESUPPLYWETHINKSUCHAMOVEISUNLIKELY,ANDTHEGOVERNMENTWILLCONTINUETOSTICKWITHITSLIMITEDBUYTORENTSCHEMEONTHEDEMANDSIDE,THEGOVERNMENTCOULDFURTHERREDUCELTVRATIOSFORMORTGAGESORFURTHERINCREASEITSHOLDINGTAX,BUTINCREASINGLYTHESEMEASURESWOULDSTARTTOIMPACTGENUINEHOMEBUYERSANDBECOMEINCREASINGLYPOLITICALLYSENSITIVE,GIVENTHEGOVERNMENTSSTANCETOENSUREPROPERTYISAFFORDABLEFORFIRSTTIMEBUYERSTHEALTERNATIVEISTOTRYTOLIMITTHEHOARDINGOFPROPERTYAND,THEREFORE,MORTGAGEBORROWINGTOASINGLEMORTGAGEPERPERSONHOWEVER,GIVENTHENEGATIVENATUREOFHONGKONGSCREDITDATABASE,THEINFORMATIONAVAILABLETOACHIEVETHISISLIMITEDASARESULT,WHILEWEWOULDEXPECTSMALLADMINISTRATIVEMEASURESAIMEDATCURBINGDEMANDATTHEMARGINOVERTHENEXT12MONTHS,POLICYWILLLARGELYBECONCENTRATEDONSUPPLYSIDEMEASURES,INOURVIEWPOLITICSANEWCHIEFEXECUTIVEIN2012WEWOULDHIGHLIGHTTHATTHECURRENTHONGKONGCHIEFEXECUTIVESTENURECOMESTOANENDINCOULDCREATESOMEUNCERTAINTYMID2012ANDTHISCOULDLEADTOSOMEPOTENTIALCHANGEINTHEPOLITICALENVIRONMENTTHEAROUNDHOUSINGPOLICYRISKISTHATEITHERTHECURRENTCHIEFEXECUTIVEWOULDLIKETOLEAVEOFFICEWITHALARGESCALERUNOFFPROJECT,SUCHASKAITAKAIRPORTREDEVELOPMENT,ORTHEINCOMINGCHIEFEXECUTIVEWOULDFEELCOMPELLEDTOACTONRISINGPROPERTYPRICESWEARERELUCTANTTODRAWTOOMUCHPARALLELWITH1997HANDOVERPERIOD,BUTWETHINKINVESTORSSHOULDEXPECTINCREASEDUNCERTAINTYAROUNDPROPERTYPOLICYFROMACHANGEINCHIEFEXECUTIVEFORTHEMOMENTHOWEVER,WEEXPECTGOVERNMENTPOLICYTOBEFOCUSEDONINCREASINGLONGERTERMSUPPLYANDTHEINTRODUCTIONOFSOMEPOLICYMEASURESATTHEMARGIN,NEITHEROFWHICHWETHINKWILLSIGNIFICANTLYCURTAILNEARTERMDEMANDIRONICALLY,WEBELIEVETHEGOVERNMENTSFISCALSPENDINGONITSTENLARGEINFRASTRUCTUREPROJECTSOVERTHENEXT12260,30069,30068,80068,60068,60068,90069,60060517,30053605,9903206,66017,12716,902IMMIGRANTSFROMCHINA53,6556006020,50031,10032,00033,20035,00035,20035,60036,10035,500MIGRATIONPOPULATIONGROWTH060,00059,60HOUSEHOLDSIZES3273213173160031,97329,32029,56329,97630,026PUBLICRENTAL60520,9VIEWPRICEFORECASTSWEEXPECTPROPERTYPRICESTOOURTHESISISTOEXPECTAPROPERTYPRICEOVERSHOOTLOWHOUSINGSUPPLY,AGOVERNMENTOVERSHOOTUNWILLINGTODEFLATEHOMEPRICES,ANOVERLYEASYMONETARYENVIRONMENT,INCREASINGCONSUMERCONFIDENCEANDINVESTMENTDRIVENDEMANDALLPOINTTOTHISTHECURRENTMOMENTUMINENDPRICESCOULDRUNFORANOTHER18260866056535160585550082777369666360585508580767269666360SOURCEBARCLAYSCAPITALESTIMATES23NOVEMBER201031BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSRISKSTOOURPRICEFORECASTSTHERISKSTOOURPRICEFORECASTSAREFOURFOLD1GOVERNMENTPOLICYCHANGESTHEGOVERNMENTBECOMESMOREINTERVENTIONISTINTHEMARKET,BYFOCUSINGMEASURESONTHEDEMANDSIDEOFTHEMARKETANDFURTHERREDUCINGAFFORDABILITYORACCESSTOCREDIT2SIGNIFICANTCORRECTIONINCHINASECONOMICGROWTHRISINGINFLATIONCAUSESTHECHINESEGOVERNMENTTORAISEINTERESTRATESSIGNIFICANTLY,SLOWINGGROWTHANDNEGATIVELYAFFECTINGCONFIDENCE,CAUSINGAPULLBACKINDEMANDANDOUTFLOWOFCAPITALFROMCHINA3USINTERESTRATESRISEFASTERTHANEXPECTEDTHISCOULDCAUSEANEGATIVEIMPACTONMARKETAFFORDABILITYANDCHANGINGBUYERPERCEPTIONWITHREGARDTOFUTUREHOMEPRICEINCREASESVIEWWHILEMOSTBORROWERSHAVEALSONEGOTIATEDACAPINTERMSOFAPRIMEMINUSMORTGAGECOLLAR,WITHBANKSEFFECTIVELYACTINGASIFTHEYAREHIBORFUNDED,AMATERIALJUMPINHIBORWOULDALSOMEANAMATERIALJUMPINPRIMEANDASIGNIFICANTRISEINMORTGAGECOSTSINTERESTRATESREMAINTHEBIGGESTGIVENTHEPOLITICALRISKSASSOCIATEDWITHACORRECTIONINTHEPROPERTYMARKET,WETHINKTHERISKCHINAINTHENEARTERMANDRISKOFGOVERNMENTINTERVENTIONISLIMITEDTOSLOWINGGROWTH,RATHERTHANCAUSINGAMARKETTHEUSINTHELONGERTERMCORRECTIONHENCE,THEREALRISKTOTHEMARKETREMAINSACHANGEINANEXTERNALFACTORTHATAFFECTSHOMEBUYERSAFFORDABILITYANDCONFIDENCEINRISINGPRICES,WHICH,FORTHEMOMENT,APPEARSTORESTWITHASIGNIFICANTSLOWDOWNINCHINASECONOMICGROWTHORWITHINCREASINGUSINTERESTRATESTHEMOREIMMEDIATERISKFORTHEMARKETCOMESFROMCHINA,INOURVIEWRISINGINFLATIONCOULDPRELUDEASIGNIFICANTUPWARDINCREASEININTERESTRATESNOTOURECONOMISTSVIEWTOENCOURAGEPEOPLETOSAVERATHERTHANSPENDTHISCOULDAFFECTFUNDFLOWS,ENCOURAGINGMAINLANDBUYERSTOREMAININAHIGHERYIELDINGANDPOTENTIALLYAPPRECIATINGRMB,RATHERTHANALLOCATINGCAPITALTOHONGKONGPROPERTYSECOND,RISINGRATESCOULDNEGATIVELYIMPACTEQUITYMARKETRETURNSHAVINGANEGATIVEAFFECTONINVESTMENTSENTIMENTANDSLOWINGDOMESTICCAPITALFLOWSINTOPROPERTYFORTHEMOMENT,THISISNOTOURCENTRALVIEW,BUTWETHINKITREMAINSACONCERNINVESTORSSHOULDBEMINDFULOFTHELONGERTERMRISKFORTHEMARKET,HOWEVER,CONTINUESTORESTWITHUSINTERESTSWHILETHERISEINMORTGAGELENDINGOVERTHEPASTTHREEYEARSREFLECTSTHEINCREASEDMARKETTURNOVERANDRISEINPROPERTYPRICES,LITTLEEQUITYEXTRACTIONONREFINANCINGANDASIGNIFICANTPRINCIPLEREPAYMENTRATEONTHEMORTGAGEBOOKHASMEANTTHATHK250300BNHASBEENLENTONPROPERTYOVERTHEPASTTHREEYEARS,ATATIMEWHENONLY33,000NEWHOMESHAVEBEENADDEDTOTHEHOUSINGSTOCKINCREASEDMORTGAGEBORROWINGWITHINVESTMENTDRIVENDEMANDANDTHEAVAILABILITYOFCREDITINCREASINGLYDOMINATINGTHEMAKESUSINTERESTRATESTHEMARKET,WEWOULDEXPECTBORROWINGLEVELSTOINCREASEOVER201112FIRSTTIMEBUYERSWILLLARGESTANDMOSTOBVIOUSRISKLIKELYNEEDTOINCREASINGLYTAPTHEMIPTOFUNDDEPOSITS,UPGRADERSWILLNEEDFURTHERDEBTTOPUPTOBRIDGETHEWIDENINGHOUSINGLADDERANDINVESTORSWILLLIKELYGEARUPONLOW,AVAILABLEDEBTENCOURAGEDBYTHEPROSPECTOFMAKINGAPROFITONTHEBACKOFSOMEONEELSESMONEY23NOVEMBER201032BARCLAYSCAPITAL|HONGKONGPROPERTYDEVELOPERSHIDDENSUPPLYTHISISNOTTOSAYOUTSIDETHOSETAKINGMORTGAGESTHROUGHTHEMIP,LTVONMORTGAGESARELIKELYTOMATERIALLYRISEOVERTHEIRCURRENT60AVERAGELEVELHOWEVER,ITDOESHIGHLIGHTTHATPROPERTYBUYERSWILLBEINCREASINGLYDEBTFUNDEDANDTHEREFOREMORESENSITIVETOINTERESTRATESTHELONGERTHISCYCLECONTINUESHENCE,OURBIGGESTCONCERNISTHATTHEMARKETWILLSIMPLYBECOMEMOREVULNERABLETOANINTERESTRATEUPCYCLEANDWETHINKBY2H12,THISWILLBETHEBIGGESTANDMOSTOBVIOUSRISKTOAPOTENTIALCORRECTIONINPROPERTYPRICESATURNINTHECYCLEWILLSEETHEWITHREGARDSTOAPOTENTIALPROPERTYPRICECORRECTION,WETHINKINVESTORSSHOULDBEMINDFULRELEASEOFHIDDENSUPPLYANDTHEOFTHEVOLATILENATUREOFHONGKONGPROPERTYPRICES,WHICHINPARTREFLECTSTHESMALL,EQUITYREMOVALOFRENTALSUPPORTDRIVENNATUREOFTHEMARKETGIVENTHESENSITIVITYTOCHANGESINDEMANDANDTHEDESIRETOHOARDPROPERTYINTOANINVESTMENTDRIVENUPCYCLE,THEREISALWAYSAHIDDENELEMENTOFOFFMARKETSUPPLYHELDBYINVESTORS,WHICHINTHISCYCLEISLIKELYTOBEEXACERBATEDBYLOWHOLDINGCOSTSINAPRIL,THEGOVERNMENTANNOUNCEDA105VACANCYRATEFORPROPERTIESOVER1,100SQFT,EVIDENCE,INOURVIEW,OFTHEINVESTMENTDEMANDINTHISMARKETYET,DEFLATINGMORTGAGECOSTSBYCAPITALAPPRECIATIONSHOWSTHEINCENTIVEFORINVESTORSTOCONTINUETOHOLDPROPERTIESVACANTFORTHEEASEOFFUTURESALETHEREISTYPICALLYA10SALESPRICEDISCOUNTFORATENANTEDPROPERTYWHILEWESEENOREASONFORTHISSTOCKTORETURNTOTHEMARKETINTHENEARTERM,ONCETHECYCLETURNS,SUPPLYWILLLIKELYCOMEBACKTOTHEMARKET,REMOVINGTHEPERCEPTIONOFLOWSUPPLYANDRENTALYIELDSUPPORTFORPRICESFIGURE600306002036060SOURCEBARCLAYSCA