Goldman Sachs published a research report that since the last update, the real estate sector in Hong Kong has faced increased pressure. Unexpected increase in US inflation, rate hike is expected to heat up while the Mainland's real estate market is on the downside. On the Hong Kong and Mainland property markets, the Bank noted a decline in trading. According to analysts' views on Mainland housing prices, the bank downvoted model price estimates. Goldman Sachs slightly raised its local office price estimates over the next two years while maintaining broadly unchanged retail and residential price forecasts. The catalyst for the future of Hong Kong's office properties is the long-awaited liberalisation of immigration control in Hong Kong. Compared with the Bank's expectations, Hong Kong's business performance in the past half of the year was broadly mediocre. Moreover, the bank thought it was inferior to the share price distribution compared to earnings. While the distribution per share of most local developers was broadly flat year-on-year, CK ASSET (01113.HK) distribution per share was impressive 21% YoY.
The bank believes that the downward revaluation of Hong Kong's real estate stocks is due to the sharp rise in asset value and relatively low capital returns. The Bank's view of keeping the sector fair value of NAV and distribution per share was maintained at 50% of its target price estimates. Considering rising agricultural land prices in Hong Kong, interest rate expectations and developer's latest sales plan, the net asset value of Hong Kong real estate stocks was revised from 4% to 17% and adjusted the target price from 13% to 21%. See also table.
To reflect the above forecast revision, Goldman Sachs raised CK Asset Group's investment rating from Neutral to Buy; SHKP (00016.HK) and New World (00017.HK) downgraded from Buy to Neutral; Confidence (00083.HK) downgraded from Buy to “Sell”; Maintain Kerry Build Set a Buy rating of (00683.HK); Maintains Henderson's (00012.HK) Neutral rating.
In view of the interest rate forecast, the Bank revised the basic earnings per share per share for Hong Kong real estate stocks covering FY2021 to 2023, ranging from 7% to 17%, in light of the forecast to raise interest rates in the next two years.
Goldman Sachs explained that the Company provided the largest upside, followed by Kerry Properties, according to its estimated historical payout rate under control of the payout ratio. Confidence, on the other hand, offers minimal upside space. The Bank noted a clear correlation between the share price of Hong Kong real estate shares and the distribution revision. This explains why the share price of CK ASSET and Kerry Properties have outgrown this year, and the momentum is expected to continue. In the broader real estate sector, the bank continued to be positive about ESR (01821.HK) and Sunelink (01686.HK).