HK Property Monthly：Deterioration in the retail sector saw signs of acceleration

Deutsche Bank Markets Research Asia Hong Kong Property Industry HK Property Monthly Date 24 August 2015 Industry Update Deterioration in the retail sector saw signs of acceleration Primary volume remains light on few new launches; retail downfall accelerated  ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Foo Leung Research Associate (+852) 2203 6239 foo.leung@db.com Top picks CK Property (1113.HK),HKD54.55 Buy SHK Properties Ltd (0016.HK),HKD104.00 Buy New World Dev (0017.HK),HKD8.23 Buy Henderson Land Dev. Co. (0012.HK),HKD47.70 Buy Source: Deutsche Bank Companies Featured CK Property (1113.HK),HKD54.55 Buy SHK Properties Ltd (0016.HK),HKD104.00 Buy New World Dev (0017.HK),HKD8.23 Buy Henderson Land Dev. Co. (0012.HK),HKD47.70 Buy Hongkong Land Holdings Ltd (HKLD.SI),USD7.25 Hold Hysan Development (0014.HK),HKD31.90 Sell Great Eagle Hldgs (0041.HK),HKD24.50 Sell Source: Deutsche Bank July was a relatively quiet month for the primary market, with the only major launch being URA's Heya Crystal (with 345 units sold) in late July. Given the lack of large-scale project launches recently, we expect sales volume in August to stay soft. In our view, developers are still observing the impact from recent share market volatilities, and are only launching small batches of units to test the market. On the other hand, there are more signs that deterioration in the retail market has accelerated, with more retailers announcing plans to consolidate their operations or close down. The latest is Coach, reportedly to close down its flagship store in Central, Hong Kong. Retail sales -1.6% YoY YTD; retail prices in Kowloon decline 17% MoM Retail sales value declined 1.6% YoY to HK$245.6bn YTD June. This was particularly driven by deteriorating sales of jewellery/watches/valuable gifts (-15.9% YoY). According to JLL, high street shops in the four core retail districts (Causeway Bay, Central, Mong Kok and Tsim Sha Tsui) have seen YTD declines of 6.7% and 5.5% respectively in average rents and capital value in 1H15. In July, as reported by Midland, among these four core retail districts, only eight street-front units were transacted (-38% MoM), and the ASP of which dropped another 0.9% MoM, registering an YTD decline of 9.6%. As of end-July, 89 high street positions were reported vacant in the four districts, implying an average vacancy rate of 3.7%. Tsim Sha Tsui saw the highest vacancy rate of 5.5% with 37 vacant positions. Primary volume -27% MoM in July; developers slowed their launching pace Sino Land’s Corinthia By The Sea (514 units) was the only major launch with sales registered in July. The pause in new launches has dragged primary private residential sales volume down 27% MoM and 55% YoY to 1,128 units, with total value of HK$16.3bn (+13% MoM and -44% YoY). Other sales contributors included Kerry’s Dragon Range (66 units), SHKP’s Ultima (63 units), CK Property’s Viva (57 units) and NWD’s Skypark (40 units). Coming up, Heya Crystal, URA’s major launch in late-July, will start registering sales in August. As of 20 August, YTD primary private residential sales volume amounted to 10,383 units for HK$107.1bn, flat MoM and slightly up 3% YoY. Secondary volume mostly flat MoM in Jul; remained 33% below 10-yr average Sales momentum in June continued for another month. According to Land Registry, 4,472 secondary transactions (flat YoY) were in July, still 33% lower than the average monthly volume seen in the past decade. At the mean time, Centa-City Leading Index (CCL) grew 1.3% MoM to a record high of 145.48 before it topped out in early-August. Cautious on prime retail landlords; prefer prime office landlords/developers We are more concerned about the outlook for the HK retail market in light of the expectations for a soft economy and falling tourist arrivals. We expect a more imminent and sizeable correction in the prime retail market. We retain our Sell recommendation on the prime retail landlords, Great Eagle and Hysan. In contrast, we prefer prime office landlords on a more positive outlook