20180613-高盛-Potential_introduction_of_vacancy_tax_may_affect_more_on_sentiment_than_fundamentals,_in_our_view_10页_302kb

Summary of Hong Kong Real Estate: Residential

Core Content

The document discusses the potential introduction of a vacancy tax in Hong Kong and its implications for the residential real estate market. It also provides insights into the current market conditions, government policies, and investment recommendations for real estate companies in the region.

Key Points on Vacancy Tax

• Government Focus: There has been increased discussion among key officials about introducing a vacancy tax, with Carrie Lam, the Chief Executive, indicating a decision may be made within the month of June 2018.
• Scope of Tax: The proposed vacancy tax would only apply to the primary market, targeting developers with unsold properties rather than individual homeowners, to avoid complexity in the secondary market.
• Tax Structure: The tax is expected to be a higher rate than the current 5% government rate, applied to properties that have been vacant for over one year after the issuance of an occupation permit.
• Impact Assessment:
  • As of 1Q2018, there were approximately 9,000 vacant units in the primary market, a relatively small number compared to the annual transaction volume.
  • The secondary market has a higher number of vacant units, but they are not targeted by the proposed tax.
  • The absolute level of the tax is considered manageable even at multiple times the base rate, due to the relatively low rental yield (around 2.3%) and the limited number of affected units.
• Sentiment vs Fundamentals: The tax is expected to have a directionally negative effect on market sentiment but limited impact on fundamentals.

Government Policies and Land Supply

• Supply Focus: The government's overall policy objective remains focused on increasing supply, as stated by Carrie Lam in her Policy Address (Oct 2017) and recent public consultations.
• Task Force on Land Supply: The task force has proposed 18 land supply options, covering both short-to-medium and medium-to-long term strategies, including developing brownfield sites, tapping into private farmland, and reclamation projects.
• Public Consultation: The task force is conducting a five-month public consultation (ending Sep 2018) to gather input on these land supply options.

Market Trends and Investment Outlook

• Price Trends: The secondary residential price index (CCL) has been trending upwards in recent years, with a 10% increase in 2018YTD.
• Transaction Volume: There has been a decline in transaction volume, with a 21% qoq drop in 1Q18, though some improvement was noted in May and June.
• Investment Recommendations:
  • Wharf REIC (1997.HK): Given its retail exposure and strong tenant performance, it is recommended as a Buy with a target price of HK$66.
  • SHKP (0016.HK): Recommended as a Buy due to strong rental profits and high development margins, with a target price of HK$166.
  • Sino Land (0083.HK): Recommended as a Buy due to its potential key project in Kwun Tong, with a target price of HK$17.
• Risks:
  • Policy changes could significantly impact the market.
  • Rising interest rates may affect buying sentiment and financing costs.
  • Uncertainty in market direction due to potential changes in monetary policy and QE reversals.

Sector Valuation and Discount to NAV

• The sector is trading at a 40% discount to 12-month forward NAV, indicating potential value opportunities.
• Wharf REIC is at a 20% discount, SHKP at 25%, and Sino Land at 30% to their respective FY19E NAVs.

Investment Strategy and Tools

• GS Factor Profile: A tool used to assess stocks based on Growth, Financial Returns, Multiple and Integrated attributes.
• M&A Rank: A scoring system from 1 to 3, indicating the likelihood of a company being acquired.
• Quantum Database: A proprietary database used for financial statement analysis and company comparisons.
• GS SUSTAIN Strategy: A global investment strategy focused on long-term alpha through high-quality industry leaders with superior returns on capital and effective ESG risk management.

Analysts and Contact Information

• Justin Kwok, CFA and Colin Yao are the analysts covering Hong Kong real estate.
• Contact details:
  • Justin Kwok: +852-2978-0481 | justin.kwok@gs.com
  • Colin Yao: +852-2978-1474 | colin.yao@gs.com
• Both are based at Goldman Sachs (Asia) L.L.C.

Regulatory Disclosures

• The report includes regulatory disclosures for various jurisdictions, including United States, Australia, Brazil, Canada, Hong Kong, India, Japan, Korea, New Zealand, Russia, Singapore, Taiwan, United Kingdom, and the European Union.
• These disclosures cover conflicts of interest, analyst compensation, and distribution of investment ratings.

Investment Banking Relationships

• The distribution of investment ratings reflects the percentage of companies in each rating category that Goldman Sachs has provided investment banking services to in the previous 12 months.
• The rating distribution is as follows:
  • Buy: 35%
  • Hold: 53%
  • Sell: 12%
• The M&A rank is used to score companies based on acquisition probability, with ranks from 1 to 3.

Conclusion

The introduction of a vacancy tax is expected to negatively impact market sentiment but not significantly affect fundamentals. The government's focus remains on increasing supply and optimizing existing resources. Investment in the sector should be selective, with a preference for retail-exposed landlords and developers with strong fundamentals. The sector is currently undervalued, trading at a significant discount to NAV, offering potential for value appreciation.