Deutsche Bank Markets Research Asia Hong Kong Property Property Industry Hong Kong Property Date 19 October 2017 Industry Update Cooler times Demand/supply dynamics expected to normalize to reflect local demand ________________________________________________________________________________________________________________ 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)083/04/2017. Jason Ching, CFA Research Analyst (+852)22036205 jason.ching@db Franco Lam Research Analyst (+852)22036226 franco.lam@db Jeffrey Gao, CFA Research Analyst (+852)22036256 jeffrey.gao@db Stephen Cheung, CFA Research Analyst (+852)22036182 stephen-a.cheung@db Foo Leung Research Associate (+852)22036239 foo.leung@db Key Changes Company Target Price Rating 0016.HK 124.30 to 122.30(HKD) - 1113.HK 68.60 to 69.30(HKD) - 0004.HK 65.60 to 64.60(HKD) - 0012.HK 47.90 to 47.50(HKD) - 0017.HK 11.10 to 11.00(HKD) - 0083.HK 14.50 to 14.40(HKD) - 0014.HK 32.90 to 32.30(HKD) - 0683.HK 30.10 to 30.00(HKD) - HKLD.SI 6.30 to 6.14(USD)- Source: Deutsche Bank Foreign demand has been a significant booster to the HK property market since 2010. Nevertheless, following various policies targeted at discouraging or limiting foreign demand, we expect demand/supply dynamics to normalize and to reflect local fundamentals. Specifically, following recent measures imposed by the Chinese government to restrict Chinese companies investing in foreign real estate, we expect office cap rates to expand. On factoring in a 25bps cap rate expansion in the next 12 months (from flat previously), we cut our NAV estimates by 0.5%-2.5% and TP by 0%-2.5%. Meanwhile, with fewer foreign players, we anticipate more rational pricing in the land market. Expect 0.5%-2.5% downside risk to NAVs as cap rates normalize Cap rates for HK office properties have historically tracked US 10-year Treasury Yield with an average spread of 120bps. Since hitting a trough in 2016, US 10- year Treasury has risen by 70bps but cap rates have compressed further, driven by an influx of foreign capital. However, this relationship has broken down considerably since 2015 following the influx of Chinese buyers. The current spread of 45bps is the narrowest in three years, which is not sustainable, in our view. HK office cap rates should theoretically expand to 3.52% or a 75bps expansion
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