巴克莱资本88页香港房地产行业深度研究报告 英文

巴克莱资本香港房地产行业深度研究

EQUITY RESEARCH HONG KONG PROPERTY DEVELOPERS Initiation of coverage: Bubble wrap

Positive view on Hong Kong property developers: Although property prices are already overvalued against long-term fundamentals, we expect them to overshoot; low supply, a government unwilling to deflate house prices, negative real mortgage rates and high levels of equity are all supportive of higher property prices, in our view. While all eight developers should benefit, our 1-Overweight picks – SHKP, Sino Land and Kerry Properties – reflect our preference for shorter-duration land banks and the pre-selling of developments: ie, business models that capture the late-cycle returns, while managing the risks inherent in Hong Kong’s volatile property prices. Property price momentum remains: Despite the government’s recent measures, negative mortgage rates, a belief in the renewed investment potential of housing and strong homebuyer confidence will likely allow property price momentum to run for another 18-24 months. We forecast residential prices will increase 10-15% in 2011 and 10-15% in 2012: today’s residential market is more comparable to 1994/95 than the peak cycle years of 1996/97, in our view.

Look to capture late-cycle returns: While rising property prices are positive for all eight developers, our preference is for SHKP, Sino Land and Kerry, companies focused on pre-sales, with shorter-duration land banks and a focus on the cash-rich upper rungs of the housing ladder to capture the returns and manage the inherent risks of this stage of the cycle. Our 3-Underweight rating on Hang Lung Properties (HLP) reflects the high expectations priced into the stock and that investors have largely ignored the potential land appreciation tax (LAT) liabilities of its commercial properties in China.

US and China interest-rate risks: In the near term, higher interest rates in China, discouraging investment flows and negatively impacting confidence, remain a key risk. Yet, the largest risk, in our view, remains US interest rates, especially given the increased mortgage borrowing by homebuyers. We believe this interest rate link and investor sentiment will continue to tie developers’ stock prices to US-dollar movements. Figure 1: Hong Kong property developers’ valuation table

Price Potential (HK$)

Rating Price targetup/downside

Sino Land (83 HK) 1-OW 15.40 20.00 30%SHKP (16 HK)

1-OW 130.10 162.09 25%Kerry Properties (683 HK) 1-OW 40.50 48.63 20%Cheung Kong (1 HK)

2-EW 116.70 137.93 18%Henderson Land Dev. (12 HK) 2-EW 55.45 62.75 13%New World Dev. (17 HK) 3-UW 15.20 16.84 11%Hang Lung Group (10 HK)

3-UW 49.05 48.72 -1%Hang Lung Properties (101 HK)

3-UW

35.80

34.27

-4%

Note: Pricing as of 22 November 2010 Source: Barclays Capital estimates

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA.

23 November 2010

INITIATING COVERAGE

Hong Kong Property Developers 1-POSITIVE

from N/A

For a full list of our ratings, price targets and earnings in this report, please see table on page 2

Hong Kong Property Investors Andrew Lawrence +852 290 33319

wrence@ Barclays Bank, Hong Kong

Jonathan Hsu +852 290 34732

jonathan.hsu@ Barclays Bank, Hong Kong

Wendy Luo +852 290 34673 wendy.luo@ Barclays Bank, Hong Kong

Guide to the Barclays Capital rating system Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector coverage universe”).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative.

巴克莱资本香港房地产行业深度研究

Summary of our Ratings, Price Targets and Earnings Estimates in this Report

Company

Hong Kong Property Developers

Cheung Kong (Holdings) Ltd. (1 HK / 0001.HK) Hang Lung Group Ltd. (10 HK / 0010.HK) Hang Lung Properties Ltd. (101 HK / 0101.HK)

Henderson Land Development Co., Ltd. (12 HK / 0012.HK) Kerry Properties Ltd. (683 HK / 0683.HK)

New World Development Co., Ltd. (17 HK / 0017.HK) Sino Land Co., Ltd. (83 HK / 0083.HK)

Sun Hung Kai Properties Ltd. (16 HK / 0016.HK)

Rating

Price

Price Target

EPS FY1 (E)

EPS FY2 (E)

OldNew 22-Nov-10OldN/A1-PosN/A2-EWN/A3-UWN/A3-UWN/A2-EWN/A1-OWN/A3-UWN/A1-OWN/A1-OW

New %Chg Old New %ChgOldNew%Chg

- - - - - - - -

116.70 N/A137.9349.05 N/A48.7235.80 N/A34.2755.45 N/A62.7540.50 N/A48.6315.20 N/A16.8415.40 N/A20.00130.10 N/A162.09

- N/A 8.53 - N/A 3.23 - N/A 1.38 - N/A 2.42 - N/A 2.25 - N/A 1.40 - N/A 0.97 - N/A 5.88

- N/A9.34- N/A2.53- N/A1.41- N/A2.87- N/A3.06- N/A1.54- N/A1.11- N/A7.48

Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital. Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative

巴克莱资本香港房地产行业深度研究

INVESTMENT SUMMARY

We initiate coverage of the Hong Kong property developers with a 1-Positive sector view. Strong consumer confidence, negative mortgage rates and the availability of credit will likely encourage demand to chase a constrained stock of available properties over the next 18-24 months. We expect already overvalued property prices to increase further. All eight developers should benefit, but the best risk/returns are likely to come from developers whose business model is focused on faster pre-sales, a shorter-duration land bank and a selective land-acquisition strategy. Our 1-Overweight picks are SHKP, Sino Land and Kerry Properties.

Property price momentum remains: Distorted by low interest rates, Hong Kong property prices are already 28% overvalued. Yet, a near-term correction appears unlikely. Today’s residential market is more comparable to 1994/95 than the previous peak cycle years of 1996/97, in our view. However, we believe the longer interest rates remain low and household confidence remains strong, the greater the prospects of a more material overshoot in prices.

Negative mortgage rates, a belief in the renewed investment potential of housing and confidence that prices can rise and panic that supply will not be available in a few months’ time will likely allow the current momentum in end-prices to run for another 18-24 months. With forecast private residential completions of only 14,000-units per annum (pa) for the next two years, demand will be chasing a constrained stock of available properties.

Government policy is likely to remain focused on slowing price growth as opposed to correcting high prices, hence we see a continued focus on longer-term supply and the introduction of demand measures at the margin, neither of which we think will significantly curtail prices. As a result, we forecast property prices will increase 10-15% in 2011 and 10-15% in 2012: the best performance will likely come from those properties in the more equity-rich, upper rungs of the housing ladder.

Look to capture late-cycle returns: While expected property price increases should benefit all eight developers, our preference is for those developers – SHKP, Sino Land and Kerry – whose business model is focused on a faster ‘asset-turn’ sales approach, shorter-duration, prime land banks and likely to employ an selective land-acquisition strategy. We believe this business model offers the best risk/reward trade-off to capture the upside in prices at this stage of the cycle, while managing the risk of a potential future price correction.

From a valuation perspective our top picks are SHKP, Sino Land and Kerry, which offer 20-30% potential upside to current prices. We have a 2-Equal Weight rating on Cheung Kong and Henderson Land, which offer 13-18% potential upside to current share prices, and a 3-Underweight on Hang Lung Properties, Hang Lung Group and New World Development. We like HLP’s focus on commercial properties in China, but think price expectations for execution of its strategy are high and that investors are yet to price in the potential LAT liability.

US & China interest-rate risks: In the near-term, risks lie with a significant rise in China interest rates that discourage fund flows into Hong Kong and negatively impact investor sentiment. However, we believe the longer-term risks from increasing US interest rates remain the largest and most obvious risk to the market, especially as homeowners, via increased floating rate mortgage borrowing, are becoming more sensitive to potential interest-rate movements. In this regard, we think property developers’ stock prices will remain correlated with US-dollar movements, as a strong US dollar – in its own right – would imply a US economic recovery and rising interest rates.

巴克莱资本香港房地产行业深度研究

CONTENTS

RISING PROPERTY PRICES OVER 2010..........................................................................................5 ECONOMIC OUTLOOK.......................................................................................................................9 HOUSING DEMAND MODEL...........................................................................................................12 HOMEBUYER DEMAND...................................................................................................................14 HOUSING SUPPLY.............................................................................................................................23 GOVERNMENT HOUSING POLICY.................................................................................................26 PROPERTY PRICES............................................................................................................................30 IMPLICATIONS FOR DEVELOPERS................................................................................................34 VALUATIONS....................................................................................................................................38

COMPANY SECTION

SUN HUNG KAI PROPERTIES (1-OVERWEIGHT; PT HK$162.09; +25%).................................56 SINO LAND (1-OVERWEIGHT; PT HK$20; +30%).......................................................................59 HENDERSON LAND DEVELOPMENT (2-EQUAL WEIGHT; PT HK$62.75; +13%)..................62 CHEUNG KONG (2-EQUAL WEIGHT; PT HK$137.93; +18%)....................................................65 NEW WORLD DEVELOPMENT (3-UNDERWEIGHT; PT HK$16.84; +11%)..............................68 KERRY PROPERTIES (1-OVERWEIGHT; PT HK$48.63; +20%)..................................................71 HANG LUNG PROPERTIES (3-UNDERWEIGHT; PT HK$34.27; -4%)........................................75 HANG LUNG GROUP (3-UNDERWEIGHT; PT HK$48.72; -1%).................................................79

巴克莱资本香港房地产行业深度研究

RISING PROPERTY PRICES OVER 2010

Strong consumer confidence, low mortgage rates and a renewed belief in the investment potential of housing has caused demand to chase a constrained stock of available properties over 2010.

Distorted by low interest rates, property prices are 28% overvalued.

However, the residential property market appears, for the moment, more comparable to that of 1994/95 than the peak years of 1996/97.

Residential prices

Figure 2: Home buying sentiment

Note: Buy/Rent sentiment is the ratio of buy-to-rent transactions undertaken by Midland Realty on a monthly basis Source: Midland, Centaline, Barclays Capital

Property prices are up 19%…

Residential property prices are up 19% year-to-date (YTD), following an increase of 29% in 2009. Since bottoming in July 2003, Hong Kong’s residential property prices have risen 170%. Strong consumer confidence, high affordability and a belief in the renewed investment potential of housing has caused demand to chase a constrained stock of available properties over 2010.

Figure 3: Transaction volumes and prices

Source: Midland, Barclays Capital

巴克莱资本香港房地产行业深度研究

Housing demand

We estimate that 50-60% of 2010’s home buyers were up-graders, 30% were investors and the remainder were first-time buyers. Despite all the political talk about first-time buyers, the widening of prices between rungs of the housing ladder, the greater proportion of households aged 35-44 and limited growth in owner occupation all point to equity-rich up-graders as the main driving force behind rising prices and transactions levels.

The increasing dominance of up-graders is evident from the rising percentage of transactions of higher priced properties: 37% of all transactions this year have been for properties over HK$3mn against 29% in 1996, when property prices were last at a similar level. In the highly equity-rich HK$20mn-plus segment of the market there have been 2,628 transactions YTD against 2,240 sales in 1997, the last cycle’s peak.

… encouraging first-time buyers

into the market…

First-time buyers were supported by low mortgage rates and improving consumer confidence. The cost of paying the monthly mortgage has remained relatively low, at just 35% of first-time buyer household income, although affording the 30% deposit to put down on a property has becoming increasingly prohibitive for most first-time buyers. However, rising prices continued to encourage first-time buyers into the market. Figure 4: First-time buyer affordability and house price/earnings ratios

Source: Hong Kong government, Barclays Capital

Demand from mainland buyers remained a major driver of prices over 2010. Centaline estimates that mainland purchasers accounted for 24% of buyers of flats worth more than HK$12mn in 2010, compared with 18.1% in 2009 and 11.2% in 2008. In 2007, 9.2% of buyers in the luxury residential market were mainlanders. In contrast, only 5.8% of the buyers in the mass-market came from the mainland, compared with 5.6% in 2009 and 4.3% in 2008.

…and while confirmor transactions were largely

absent…

Speculative activity, as detailed by confirmor transactions, were notable by their absence. Although at the lower end of the market it was evident that property trading, as determined by property held for less than 12 months, had increased. Based upon Centaline’s data, we estimate that 9% of the total unit turnover in the first ten months of this year has been of properties traded within 12 months of purchase. However, despite the recent introduction of a holding tax on property, we expect the realisation that increased price volatility, as a result of low supply and abnormally low interest rates, will argue less for short-term speculation and more for medium-term holding of high-quality stock.

巴克莱资本香港房地产行业深度研究

Figure 5: Confirmor transactions

Figure 6: % of properties sold within one-year of purchase

Source: Midland, Barclays Capital

Source: Centaline, Barclays Capital

…investment flows into the

market increased…

Given the low cost and availability of credit, property remains an attractive speculative vehicle. Mortgage loan growth has risen 12.6% in the first nine months of the year, despite the unprecedented repayment of mortgage principle due to low interest rates.

Figure 7: Outstanding mortgage loans

Source: Hong Kong Monetary Authority, Barclays Capital

Price growth in the luxury residential market slowed in 2010, with prices up 9.6% YTD according to Savills. This is perhaps unsurprising, given that prices rebounded by 45% in 2009 and are now some 29% above their 1997 peak. The luxury housing market remains dominated by high net worth individuals and driven by IPO money raised in Hong Kong, which is partly used to acquire luxury properties rather than being repatriated to the mainland. Despite very high prices, this remains a cash-driven market, with sentiment tied to overall economic confidence and stock market performance.

巴克莱资本香港房地产行业深度研究

Figure 8: Luxury residential prices and the HSI small cap index

Source: Savills, Bloomberg, Barclays Capital

Bubble talk

…as a result, property prices are

28% above long-term

fundamentals…

A hot topic has been how far Hong Kong property prices have deviated from fundamentals and are forming a ‘bubble’. Based upon our long-run house-price-to-earnings ratios since 1975 for the mass market, excluding the distortions created by abnormally low mortgage rates and inflows of external capital, we estimate that property prices are 28% above their long-term average. It should be noted, however, that such overvaluation can last for extended periods – six years during the early to mid 1990s – and that our price-to-income ratios were 63% higher than their long-term averages at the peak of the market in 1997. However, for the moment at least, prices remain well supported by low mortgage rates, strong availability of credit and high levels of housing equity built up over the past few years. Today’s residential property market is more comparable to that of 1994/95 than it is to the peak years of 1996/97, in our view.

Figure 9: House prices and household incomes

Source: Hong Kong government, Barclays Capital

…but remain well supported

巴克莱资本香港房地产行业深度研究

ECONOMIC OUTLOOK

Hong Kong has benefited from China’s massive fiscal stimulus and the extraordinarily easy monetary measures from the FED.

With no change expected in US interest rates and little re-pricing of HIBOR-based mortgages, rising Hong Kong inflation implies increasingly negative real mortgage rates. We expect the US dollar to remain relatively weak over the next 12 months, encouraging foreign inflows and forcing Hong Kong savings to be invested locally.

Economic forecasts

Hong Kong has benefited from China’s massive fiscal stimulus and the extraordinarily easy monetary measures from the FED. Economic recovery is evident from retail sales, the property market and an improving labour market. The consensus economic forecast for Hong Kong GDP growth is 5.7% in 2010 and 4.5% in 2011/12. US interest rates are forecast to remain flat for the whole of 2011. Figure 10: Economic forecasts

(%)

Gross domestic product Private consumption Gross fixed investment

Consumer prices Money supply

Unemployment rate

3-month interbank rate Prime lending rate

3.90 7.80

15.40

3.50 6.80

20067.00

20076.40

20082.20

2009 -2.80

2010E5.70

2011E4.50

5.90 8.50 2.40 -0.40 4.90 4.40 7.10 3.40 0.80 -1.80 9.10 6.30

20.80

0.90 5.00

2.60

5.80

0.10 5.00

0.25 5.00 7.70

0.25 5.00

7.40

2.10 2.00 4.30 0.60 2.60 3.00 4.80 4.00 3.60 5.40 4.40 3.90

Source: Bloomberg, Barclays Capital estimates

Inflation

Inflation is forecast at 2.6% for

2010 and 3% for 2011…

Inflation is forecast at 2.6% for 2010 and 3% for 2011, which, given that Hong Kong is a price-taker from China, is largely consistent with the outlook for China’s inflation at 2.9% in 2010 and 3% in 2011. Rising inflation in China, however, suggests that the current risk to these forecasts is on the upside for 2011.

Given the US-dollar peg, differential inflation/economic growth between Hong Kong and the US has largely determined the impact of US interest-rate policy on Hong Kong asset prices. From 1985 to 1997, higher relative Hong Kong inflation provided negative real mortgage rates and high asset price growth. The opposite was true between 1997 and 2002, causing people to divert more of their savings away from housing and into leisure activities and other investments.

巴克莱资本香港房地产行业深度研究

Figure 11: Real mortgage rates and differential inflation: Hong Kong vs the US

Since 2002, it has not been differential inflation that has driven negative real mortgage rates, but the FED’s highly reflationary interest-rate policy and the re-pricing of mortgages to HIBOR by Hong Kong banks (which has effectively reduced mortgage costs by 100-150bps), which implies that this cycle has been driven more by US weakness than by Hong Kong’s growth.

…which, with no interest-rate

increases, implies 2-2.5% negative real mortgage rates…

With no change expected in US interest rates and little re-pricing of HIBOR-based mortgages, rising Hong Kong inflation implies increasingly negative real mortgage rates. Based upon a HIBOR rate of 25bps, a mortgage spread of 75bps and inflation of 3%, we expect negative real mortgage rates to average 2-2.5% over 2011. By implication, the FED would need to raise interest rates by at least 200-250bps for Hong Kong mortgage rates not to remain highly simulative to asset prices. Figure 12: Property prices and real mortgage rate

Source: Hong Kong government, Barclays Capital

We suspect that over 2011/12, the symbiotic relationship between property and inflation will likely reassert itself. Higher property prices will encourage higher inflation, which in turn will support higher wage growth and support further property price increases. Negative real mortgage rates and desired exposure to property will likely drive an increased mortgage borrowing over 2011.

巴克莱资本香港房地产行业深度研究

The US dollar

…while a weak US dollar should

also support fund flows into

Hong Kong

Our forex forecasts are that the US dollar will remain relatively weak over the next 12 months appreciating by only 5% against the euro and 8% against the yen. A weak US dollar not only encourages foreign inflows, but also forces Hong Kong savings to be invested locally.

The weakness of the US dollar, and in particular, the strengthening of the RMB, has clearly been supportive of mainland money flows. The US$/RMB has appreciated from 6.83 at the start of 2010 to 6.64 currently. Our forex strategists expect the RMB to appreciate to 6.33 by end-2011, implying an appreciation of 5.5%, and providing further support to money flow into Hong Kong property from mainland buyers.

Figure 13: US$/RMB exchange rate

Source: Bloomberg, Barclays Capital

China interest rates

In terms of China interest rates, Bloomberg consensus forecasts a one-year base lending rate of 5.7% by end-2011, which implies that there will not be a significant tightening of liquidity in China over 2011, although lending targets will likely be reduced. Whether this affects money flows into Hong Kong is questionable, the prospect of strong price increases and the desire to place money outside the mainland is likely to offset a rise in deposit rates, in our view. Given the increasing administrative measures in China on second home purchases, Hong Kong continues to remain a relatively easy destination for mainland capital.

巴克莱资本香港房地产行业深度研究

HOUSING DEMAND MODEL

Forecasting short-term residential price performance is more dependent upon changes in demand.

To determine demand and demand drivers, we use a conceptual model based upon changes in economic and social sentiment.

The basis of our model is that Hong Kong’s residential demand is largely investment driven: higher prices induce higher demand, as the positive correlation between turnover and prices demonstrates.

Forecasting demand

Forecasting short-term residential price performance is more dependent upon changes in demand, in our view. This is not to say that supply is not important, but simply to recognise the greater influence subtle shifts in demand can exert on short-term price-setting over the inelastic supply side of the market.

Demand improves when an external factor leads to a change in affordability and confidence…

Determining housing demand is difficult, given that demand embodies a wide variety of economic and social factors. In order to attempt to estimate the nature and drivers of housing demand, we use a conceptual model based upon changes in economic and social sentiment. Our model assumes a change in the market occurs when an improvement in external economic factors lead to a change in affordability/liquidity and buyer confidence. The basis of the model is relatively straightforward: in stable periods, end-buyers dominate and demand is largely driven by changes in household composition – births, deaths, marriages, divorces, etc. Turnover is relatively low, and affordability, combined with household confidence with regard to employment prospects and the ability to service the mortgage, are the main drivers to demand, in our view.

However, as the economy and household confidence improves, rising house prices are seen as a signal that it is a good time to trade. This encourages more first-time buyers into the private housing market and existing private households to use the equity in their homes to trade-up. As prices continue to rise, the investment motive returns and an increasing number of investors enter the market. This forces turnover up and drives prices higher. Confidence in rising property prices and the availability and affordability of credit become the main drivers of demand.

Ultimately, if house price inflation remains persistently high, it encourages a speculative culture, prompting people to pay more for property and encouraging them to hold more than they normally would. The availability of credit dominates and an increasing belief in the ‘greater-fool’ theory – someone will always pay more – drives demand. This, in our view, causes higher turnover levels, drives affordability ratios to unsustainable levels and disguises the real demand for property.

…reflecting the investment- driven demand for Hong Kong

property

As the following graphs show, this model – via changes in turnover, affordability, price-to-income ratios and price volatility – reflects well the shifting pattern of marginal demand in Hong Kong’s housing market, resting on the simple thesis that Hong Kong’s residential demand is largely investment driven: cheaper house prices and improved affordability do not induce higher demand.

巴克莱资本香港房地产行业深度研究

Figure 14: Housing affordability – 1983-2009

Figure 15: Transaction volumes as a % of total private housing stock

Source: Hong Kong government, Barclays Capital estimates

Source: Midland, Barclays Capital estimates

Figure: 16: House-price volatility

Figure 17: House price-to-household income ratio

Source: Hong Kong government, Barclays Capital estimates

Source: Hong Kong government, Barclays Capital estimates

巴克莱资本香港房地产行业深度研究

HOMEBUYER DEMAND

There has been an evident shift to investment-driven demand and an increasing risk appetite for property among homebuyers.

The next stage of the market will likely be driven by the availability of credit and confidence that prices can rise, and panic that supply will not be available in a few months’ time.

Despite the appearance of stretched affordability, the overly simulative nature of mortgage rates and the availability of credit will likely encourage households to increase their property exposure, leading to a period of high market turnover and rising prices.

Investment-driven demand

There has been a shift to investment-driven demand and an increased risk appetite for

property…

Although distorted by abnormally low interest rates, the implication from our model is that there has been a shift to investment-driven demand and an increasing risk appetite for property among homebuyers. In our view, this reflects expectations of a continued economic recovery and low US interest rates, the expectation of further price increases due to limited supply, cheap mortgage rates and money flow from the mainland, and a government ultimately unwilling to significantly deflate the property market.

Having been driven by affordability and the availability of equity, we expect the main demand drivers of the next stage of the market to be the availability of credit, confidence that prices can rise and panic that supply will not be available in a few months’ time. While recent government measures are likely to reduce speculative activity, we view the additional 5% cost of holding property for more than 12 months as inefficient to offset the renewed investment demand for property.

First-time buyers and the mass market

…declining unemployment and wage growth will likely drive first-time buyer confidence…

In the mass market, buyer confidence will likely improve on declining unemployment and wage growth. The current monthly cost of a repayment mortgage on a starter unit in the New Territories accounts for only 35% of the median household income and is comparable to the cost of renting. For monthly mortgage costs to reach 50% of household income (the limit for bank lending) would require mortgage rates to increase 400bps or property prices to increase by 42% from current levels.

巴克莱资本香港房地产行业深度研究

Figure 18: Affordability and property prices

Source: Hong Kong government, Midland, Barclays Capital

…although many first-time buyers appear to be taking out

85-90% LTV mortgages…

While monthly mortgage payments remain affordable, the required 30% deposit on a starter unit represents 2.73x the annual household income, making the first-time buyer more reliant on the ‘bank of mum and dad’ than at any time since 1997. Many first-time buyers are resorting to 85-90% loan-to-value (LTV) mortgages to finance deposit payments, reflecting the significant divide between the accumulated wealth of the ‘baby-boomers’ and those the 1980’s ‘hand-over’ generation.

Figure 19: Monthly mortgage rate vs rental payment

Source: Hong Kong government, Midland, Barclays

Excluding refinancing mortgages, we estimate that the penetration rate for the Hong Kong Mortgage Corporation’s (HKMC) Mortgage Insurance Program (MIP) is 17% YTD and that use of the MIP has increased notably over 2009 and 2010. Approximately 14,500 loans were drawn down in 2009, while to the end of August, 10,467 loans had been drawn down, of which 95% were used for secondary property purchases at an average mortgage size of HK$2.5mn.

巴克莱资本香港房地产行业深度研究

Figure 20: Ratio of household income to 30% deposit

Source: Hong Kong government, Barclays Capital

Figure 21: Mortgage insurance usage rate

Source: HKMC, Barclays Capital

Despite the increasing use of high LTV mortgages, we suspect that savings levels among first-time buyers are likely to be higher than they were in the 1990s, given that the average age of the first-time buyer has increased due to people waiting longer to get married and have children. In addition, the long tradition of family support for first-time buyers should, to some extent, offset the increasingly prohibitive deposit requirements.

…expectations of further price increases and help from the ‘bank of mum and dad’ will support further demand

As a result, improving economic confidence, highly affordable monthly mortgage payments and expectations that prices will continue to rise and properties may not be available or affordable in a few months, will continue to encourage first-time buyers into the market over the next 12 months.

巴克莱资本香港房地产行业深度研究

Figure 22: Affordability sensitivity ratios

Household income sensitivity table

Mortgage rate

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Mortgage rate

0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%

Mortgage rate

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

3.00%

3.25%

3.50%

-15.00%

-10.00%

-5.00%

-15.00%

-10.00%

Household income growth rate (annual rate) -5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

39 37 35 34 32 30 29 28 41 39 37 35 34 32 31 29 44

41

39

37

35

34

32

31

46 43 41 39 37 35 34 32 48 45 43 41 39 37 35 34 50 47 45 43 41 39 37 36 53 50 47 45 43 41 39 37

Capital value sensitivity

Capital value change 0.00%

5.00%

10.00%

15.00%

20.00%

29 31 33 34 36 38 40 41 30 32 33 35 37 39 41 42 31 33 34 36 38 40 42 43 31

33

35

37

39

41

43

44

32 34 36 38 40 42 44 46 33 35 37 39 41 43 45 47 34 36 38 40 42 44 46 48

Rental yield 3.75%

4.00%

4.25%

4.50%

4.75%

(208) 0 208 417 625 833 1,042 1,250 (357) (149) 59 (511)

(303)

(94)

268 476 684 893 1,101 114

322

531

739

947

164 372 581 789

249 457

284

Mortgage vs Rental Payment Differential

(669) (461) (253) (44)

(833) (625) (416) (208) 0 209 417 625 (1,001) (793) (584) (376) (168) 41

(1,174) (966) (757) (549) (341) (132) 76

Source: Barclays Capital estimates

Upgraders, investors and the mid-market

Subtle shifts in demographics have changed the dominant nature of buyers in the housing

market; the average age in Hong Kong is 41-years against 32-years in the early 1990s. As a result, the majority of homebuyers are now in the 35-44 age-group, as opposed to the 25-34 first-time buyer cohorts of the 1990s.

Upgraders are the dominant buyers of residential property…

Upgraders are typically repeat buyers looking to trade-up into larger, better-quality units through the equity built up in their homes and via savings. The 35-44 age-group is most likely to take the final step up the housing ladder: the number of adults living as couples with dependent children peaks in this period, and demand for space is paramount. It also explains why house prices in good school catchment areas have outperformed over the past ten years, as couples are prepared to pay a housing premium to provide their children with better schooling.

巴克莱资本香港房地产行业深度研究

Figure 23: First-times buyers and upgraders as a percentage of the population

Source: Hong Kong government, Barclays Capital

The increased purchasing power of upgraders has been due to employment growth, particularly in the bonus-rich financial sector, low interest rates over the past few years that allowed households to pay down the capital proportion of their repayment mortgages and the 170% rise in home prices since 2003. As a result, price growth has been concentrated in the more equity-rich sectors and the areas of strongest economic growth/or particularly constrained supply.

…reflected by widening prices up every rung of the housing ladder and across locations…

Comparing property prices per sq ft (psf) across different size properties shows that psf-prices of larger properties has increased at a faster rate than properties of a smaller size. In addition, properties on Hong Kong Island, a more equity-driven market, have risen significantly higher in price since 2003 than the same size units in the New Territories, implying that over this cycle property prices have been driven more by the availability of savings and equity from previous house purchases than by the availability of credit. Figure 24: Housing ladder prices

Source: Hong Kong government, Barclays Capital

巴克莱资本香港房地产行业深度研究

Figure 25: Price per square foot by location

Source: Hong Kong government, Barclays Capital

…supported by high levels of

equity…

The level of equity in domestic property can be seen by comparing purchase prices on 550sf mid-level units in Kowloon, as a proxy for average market prices, with the current unit sales price and the rate of capital repayment on mortgages, given the average level of mortgage rates over the period. This shows that a property purchaser prior to 2005 now has over 66% of the value of his/her property in equity, which could be used as a deposit on a larger property.

Figure 26: Equity in home prices

Date Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09

Purchase price HK$ 3,714,480 2,607,660 2,111,450 1,755,490 1,626,075 1,418,890 1,127,775 1,700,875 2,173,270 2,138,895 2,317,480 2,942,940 3,004,540

30%Deposit 1,114,344 782,298 633,435 526,647 487,823 425,667 338,333 510,263 651,981 641,669 695,244 882,882 901,362

AverageOutstanding

mortgage 1,193,852 926,545 808,788 721,265 714,060 669,493 569,257 913,464 1,234,993 1,270,082 1,431,444 1,900,537 2,019,607

Currentprice HK$ 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455 3,656,455

HK$ 2,462,603 2,729,910 2,847,667 2,935,190 2,942,395 2,986,962 3,087,198 2,742,991 2,421,462 2,386,373 2,225,011 1,755,918 1,636,848

Equity as a

30% deposit

buys 8,208,675 9,099,699 9,492,222 9,783,967 9,807,982 9,956,538 10,290,658 9,143,304 8,071,541 7,954,576 7,416,704 5,853,060 5,456,161

home price

67%75%78%80%80%82%84%75%66%65%61%48%45%

Mortgage mortgage rate 2,600,136 1,825,362 1,478,015 1,228,843 1,138,253 993,223 789,443 1,190,613 1,521,289 1,497,227 1,622,236 2,060,058 2,103,178

4.67%4.25%3.76%3.35%3.02%3.01%3.08%3.19%3.32%3.00%2.41%1.80%1.46%

Equity % of current

Source: Hong Kong government, Barclays Capital, Barclays Capital

HK$ since purchasebalance HK$

巴克莱资本香港房地产行业深度研究

Using the historical behavioural duration of mortgages in Hong Kong of 5-7 years, assuming a typical property upgrader bought a 550sq ft property six years ago with a 30% deposit, and took out a 20-year repayment mortgage, and now used the equity built up in the property as a deposit on a 750sq ft flat, then the required mortgage would be less than 55% of the purchase price of the new property. These upgrader-required percentages mortgages are typical in the middle rungs of the housing ladder and, in our view, clearly imply that the recent reductions in LTV ratios will likely only have a marginal effect on upgrader demand.

Figure 27: LTV requirements of upgraders

This demand has been further supplemented by the inflow of mainland equity-funded buyers over the past three years; attracted by the relative political stability, wealth diversification, benign tax structure and cache of having a Hong Kong address. While we suspect that the expansion of bank lending in China may have supported some buying interest in Hong Kong, the trend of mainland buyers is likely to remain a feature of the market, especially as developers are now increasingly focused on marketing their projects in the mainland.

…supplemented by cash-rich

mainland money flows…

Many of these buyers appear to be cash buyers, explaining why, since 2008, mortgages ex-refinancing have for the first time fallen below transaction levels. A revaluation of the RMB, especially a large one-off move, would make Hong Kong property more attractive to mainland buyers by giving them an immediate discount on current prices. Figure 28: Housing transactions and the number of mortgages ex-refinancing

巴克莱资本香港房地产行业深度研究

…and investment-driven

demand…

Although difficult to quantify, investment/speculative flows into property continue to remain strong, in our view. Low deposit rates are positively encouraging the cash rich into the property market, as evidenced by mortgage growth outstripping deposit growth and the high level of transaction volumes, while expected RMB appreciation has encouraged some investors to buy ahead of mainland money flows. Housing inflation is persuading people to pay more for property and encouraging them to hold more than they normally would. Figure 29: Deposit and mortgage loan growth

Source: Hong Kong Monetary Authority, Barclays Capital

For the mid-market segment, we expect continued strong demand driven by confidence in an economic recovery, a shift in the nature of demand due to changing demographics, increased household equity built up over the past seven years and investment-driven demand due to low cash rates. This price inflation is also likely to mean that demand spills back into lower priced markets, as sellers of larger units spend their equity and less affluent households search for value-for-money in the mass market.

The truly equity-rich and the luxury market

In the very top end of the market, we expect property prices to remain dominated by the prospects for cash raisings and the performance of the equity markets: this is largely a cash-driven market despite the cost of properties. Although like all small, equity-driven markets, this is the most sensitive to rapid changes in confidence. However, given the relatively positive outlook for capital flows, we would expect demand for luxury properties to remain strong.

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