Mainland land banks to provide shelter for Hong Kong developers
With their unique ability to tap into booming property markets in both Hong Kong and the mainland, local blue-chip developers have given fund managers hope that they may be able to follow on their successes of last year.
But after the property sector last year paced gains among the Hang Seng Index's other three industry groups with a blistering 64.53 per cent gain, it has endured a punishing start to this year, losing 7.59 per cent.
Still, fund managers are optimistic that with the expectation that United States interest rates will be cut and with domestic consumption driving property markets in both Hong Kong and the mainland, local property developers will be in a position to make strong returns.
'We are positive on property and we think it is going to be our major theme this year,' said Geoff Lewis, head of investment services at JF Asset Management, at a presentation earlier this month.
Interest-rate cuts could benefit Hong Kong's property market by freeing up more cash for lending and driving up demand for property.
'Property companies are the primary beneficiaries of falling interest rates, so they might outperform even in the down market in relative terms,' Mr Lewis said in an interview last week.
The US Federal Reserve is scheduled to convene at the end of this month and market observers expect it will cut rates as much as 0.75 percentage point. Since the local currency is fixed to the US dollar, Hong Kong banks are expected to follow suit.
As interest in Hong Kong's property market grows, demand for mainland real estate shows no signs of abating, Mr Lewis said.
'There is a huge demand to improve residential dwellings, to improve infrastructure and to improve offices. There is huge demand for new constructions in China,' he said.
Given their expertise, strong bottom-lines and contacts in the mainland, Hong Kong's blue-chip developers were in 'the best place to benefit from the China market', he added.
Hong Kong's major developers have started to increase their holdings in the mainland to take advantage of this relationship.
Sun Hung Kai Properties, Hong Kong's biggest property developer, last month said it would assist in the development of a 6.1 million-square-foot project in Guangzhou priced at 4.6 billion yuan. According to the company's website, it had a total land bank of nearly 46 million square feet on the mainland as of June 30.
Sino Land pegged its development land bank in the mainland at about 28 million square feet and said it planned to double its land holdings within the next 12 to 15 months, according to a company report released in September last year.
In addition to securing an additional revenue source, allocating resources to the mainland gives Hong Kong property developers a secure market on which they can fall back.
'Rather than put all their eggs in one basket, they just diversify their revenue source. That is positive,' said Teresa Chow, a fund manager at RBC Investment Management Asia.
Despite his positive position on Hong Kong's property sector, Mr Lewis said share prices of some blue-chip developers might have peaked prematurely last year and could be targeted for profit-taking in the ongoing market volatility.
Analysts expect the Hong Kong stock market to open lower today, as the United States did not cut the interest rate immediately.
The benchmark Hang Seng Index was expected to trade at about the 24,000 to 25,000 points level before the US Federal Reserve met to discuss rates, analysts said.
'The Hang Seng Index has strong support at the 24,000 to 24,200 level and the valuation of Hong Kong's blue chips are much cheaper after the market corrections,' said Patrick Yiu Ho-yin, an associate director at CASH Asset Management.
Additional reporting by Frederick Yeung
Poor start
After gaining 64.53 per cent last year, the property sector this year has fallen: 7.59%
