Stock investors seeking yields from Hong Kong landlords may be disappointed as these companies are expected to reduce payout ratios in the face of the global financial crisis, analysts said. Because of the landlords' high exposure to commercial properties, they will see shrinkage in their bottom lines due to significant declines in gross asset values, they said. However, underlying profits next year would not fully reflect the falling market because of existing leases, they noted, adding that most firms would see the effects of lower rents by 2010 when the existing leases expired. 'We expect the landlords to reduce payout ratios and retain cash. We have cut the sector's 2008 weighted average dividend by 17 per cent, 2009 by 20 per cent and 2010 by 16 per cent,' said a recent Macquarie Research report. Following the dividend cuts, the sector would show a yield of 5.3 per cent in the next financial year, it said. Macquarie said the Hong Kong landlords' share prices on December 18 had halved over the past 12 months and were trading at a 46 per cent discount to their net asset values. But it said it was still not the right time to buy the sector, as Hong Kong's economy might not bottom out until the end of next year, and a bottom for office rents might be seen in mid to late 2011. 'Past cycles show that listed prices reach their bottom three to six months before the economy and around 18 months before spot rents,' Macquarie said. Morgan Stanley also cast a cautious eye on the sector. It recently downgraded its view on Hong Kong property investors or landlords from 'in-line' to 'cautious'. The bank said landlords would not be more defensive than property developers in this downcycle, in the face of a further slowdown in demand for office space. 'Our outlook for commercial is bleaker than for mass residential,' Morgan Stanley said. It expected an overall 40 per cent drop in rents and values for Hong Kong office properties and a 30 per cent decline for retail versus a 25 per cent fall for mass residential. But Morgan Stanley said Central should fare better than average. It reckoned that no new supply and decentralisation well before the downturn have helped protect the downside risk of this submarket. The rental differential would likely stay wide throughout the downturn, it said. 'We believe some property investor firms will cut dividend payouts to retain cash for business development,' said Adrian Ngan Wai-hung, an executive director at CCB International Securities. However, Mr Ngan was also optimistic about the sector, saying that it would be more defensive compared with property developers. 'Even though their bottom lines will be hit by the negative growth in property revaluations, their underlying profits, which reflect their operating profits, will grow this year as they were still in positive rental reversion because of existing leases,' he said. An analyst at a European securities firm said Hong Kong landlords' underlying profits would not see a significant drop but their bottom lines would fall owing to the sharp decline in revaluation values. 'Developers will see a bigger and faster impact. If they fail to sell flats, it will immediately show in their earnings,' he said.