Hong Kong property is in the early stages of a downcycle and the pace of decline is set to accelerate from 4Q19, as the market slumps under the weight of the ongoing US-China trade war and local protests. We expect home prices, retail sales and Grade-A office rents to drop by 20-25% over the next 12 months, which would be the first time since Sars hit the territory in 2003 that all segments have declined concurrently. In this report, we introduce our absolute-DPS analysis, as it helps pinpoint the cycle bottom more accurately than NAV. With no buyers, there is nowhere for developers or landlords to hide. We are Underweight the entire sector.
Recent protests have similar effect to 2003 Sars
The impact of the US-China trade war since 1Q18 and the local protests that first unfolded in late-2Q19 is uncannily similar to what we experienced in 2000-03 after the IT bubble burst and Sars infected the territory. The past 18 months have seen a slowing GDP, a declining HSI, depreciating renminbi and falling tourist numbers. With no concrete solution or timetable set to fully address these issues, we expect the property market will remain under pressure.
We prefer DPS over NAV during a downturn
Historically, an average 50% NAV discount would seem to signal a property-sector trough. However, investors question the credibility and accuracy of NAV during a market downturn. Therefore, we believe analysing absolute DPS offers a more visible and predictable way to pinpoint the sector bottom. In this report, we introduce a new methodology which focuses on a target yield spread between company dividends and US 10-year Treasury. So, while NAV is still our primary valuation method, we favour our yield-based analysis during a market downturn.