Constructive drivers to support a stronger Hong Kong property market，particularly in the office space

  Constructive drivers to support a stronger Hong Kong property market, particularly in the office space  Rising office rental, resilient residential prices and retail rental to drive Hong Kong property companies’ share prices up further  We prefer Swire Properties and Kerry Properties, both rated Buy Early phase of constructive trends for Hong Kong office: We believe long-standing market concerns over a property market correction will not materialise in the near term. The fall in the Central vacancy rate (from 3.2% in 1Q15 to 2.5% currently) seems sustainable. Stronger office demand, particularly from the mainland corporates, should continue. An acceleration in cross-border activities and mainland corporates going overseas represent key drivers. We anticipate upside risks to asset prices: Residential prices will likely see support from a strong liquidity influx, while the increase in housing supply will be gradual. The much-anticipated US rate hikes matter and could lead to negative sentiment in 4Q15; however, we believe they will have little effect on affordability, given their slow pace and continuing household income growth. We raise our 2015 forecasts for Central office rental growth (to 10% from 5%) and home prices (to 10% from 0%), while keeping overall Grade A office and retail rental growth forecasts at 5%. We are positive on office and residential markets, while expecting resilient rental for listed landlords’ retail assets. Four upgrades; sector offers an average 25% upside potential: We raise our target prices by 12% on average, driven by higher NAV estimates (+5%) and narrower NAV discounts. Our earnings estimates rise by 1-4%. With developers/landlords still trading at close to 1 SD below average NAV discounts, we expect resilient physical market trends to drive Hong Kong property stock prices higher. We upgrade Hongkong Land, Champion REIT, Henderson Land and Hang Lung Properties to Buy from Hold. Our preferred stocks: Swire Properties (Buy) and Kerry Properties (Buy). Swire Properties, a non-consensus pick as our preferred HK office stock, offers one of the highest exposures to HK office and the most attractive valuation among HK landlords; Kerry Properties will benefit from improved sentiment in the China property and Hong Kong luxury residential markets, while its c40% GAV exposure to Chinese commercial assets could see upside, given the potential for yield compression under monetary easing. FIG Hong Kong Real Estate HK Real Estate From headwinds to tailwinds Summary of ratings and target prices BBG Price HSBC HSBC TP TP (Disc) Ticker 5-Jun Rating Rating Old New to NAVCompany (HKD) Old New (HKD) (HKD) (%)HK Property Companies Hang Lung Prop 101 HK 24.1 Hold Buy 26.0 31.0 (36)Henderson Land 12 HK 55.4 Hold Buy 59.0 67.0 (42)HKLand (USD) HKL SP 8.3 Hold Buy 8.0 10.5 (33)Hysan 14 HK 34.6 Hold Hold 41.2 40.0 (50)Kerry Properties 683 HK 32.0 Buy Buy 34.0 43.0 (56)Sino Land 83 HK 13.3 Buy Buy 15.2 16.0 (43)Sun Hung Kai Prop. 16 HK 131.0 Buy Buy 143.5 160.0 (37)Swire Properties. 1972 HK 25.6 Buy Buy 31.5 34.0 (44)REITs Champion REIT 2778 HK 4.5 Hold Buy 4.3 5.3 NALangham Hosp. Inv 1270 HK 3.4 Buy Buy 4.5 4.5 (25)Link REIT 823 HK 45.8 Hold Hold 55.0 53.0 NA Source: Bloomberg, HSBC estimates. Priced at close on 5 June 2015 10 June 2015 Perveen Wong*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6571 perveenwong@hsbc.com.hk Derek Kwong* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6629 derekkwong@hsbc.com.hk Ganesh Siva* Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst c