Hong Kong LandLords : Polarization – office upcycle, retail downcycle

Central office rental growth to accelerate to 15% in 2016
We forecast Central office rental growth to accelerate to 15% in 2016, from 11% in 2015 on the back of three new trends:

1) mainland financial institutions demand expanding at a faster clip, taking up 40% of new floor space leased 1-3Q15,

2) historically low vacancies in almost all districts, with landlords in Central likely benefiting from a 1.2% boost in bargaining power when lease is up for renewals in 2016,

3) mainland corporates buying up office building for their own occupations, hence further taking out supply from the already limited pool of office stocks.

Second best prime retail mall rentals to fall 8% in 2016, 5% in 2017
We see more downside for street shop rents given,

1) some new leases at lower rents are short term leases or to retailers whose margins are thin or unstable,

2) more international brand retailers are planning to consolidate their operations into fewer shops.

That said, negative impact on falling street shops rents on prime retail mall space in vicinity should be more muted given the much lower absolute rental levels. We forecast prime retail mall rentals will drop 8% in 2016 and 5% in 2017, but expect Harbour City, IFC, and suburban malls’ rental to be immune.

Technical Analysis
Daily Chart
Top pick: Hongkong Land; Downgrading Wharf, Hysan and Hang Lung to Hold
We prefer office landlords HK Land, Swire, Champion, on the back of our expectation of multi-year rental upcycle and narrowing NAV discount on stock prices. HK Land is our top pick as we expect accelerating rental growth in Central in 2016. We downgrade Wharf, Hysan and Hang Lung to Hold on expectations of declining Hong Kong retail rentals in most districts in 2016 and 2017, as well as the widening of NAV discounts in a rental downcycle. (Read Report)

Source : BNP Paribas Research

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