(Bloomberg) -- Some investors and analysts are betting on a rebound in Hong Kong developers’ shares, anticipating that a US interest rate cut will boost property purchases.
The city’s interest rates are tied to the US, given its currency peg. Morgan Stanley analysts predict a 5% home price recovery in 2025, reversing a likely 8% drop this year.
Hong Kong developers have long struggled due to a weak economy and a steady loss of faith in the city’s status as Asia’s premier financial hub. A pivot by the Federal Reserve may bring some relief at a time when their stocks are trading at all-time low valuations.
“If home investment demand recovers, this should drive volume and potentially a price recovery in the residential property market,” said Toshio Tangiku, a portfolio manager of indirect real assets team at abrdn. Developers like Sun Hung Kai Properties Ltd. and Henderson Land Development Co. stand to benefit the most, he said.
Hong Kong has long relied on auctioning land for revenue, but falling home prices and rising office vacancies in the past few years have prompted developers to pull back. That’s driven an index of the city’s home prices to nearly an eight-year low.
A US rate cut will help boost the attractiveness of high-yield plays such as Link REIT and Kerry Properties, according to Raymond Cheng, head of China property research at CGS International Securities Hong Kong.
However, analysts caution that it may take time for developers to benefit from a US rate cut, as banks are typically slow to pass on the reduction, and weak buyer sentiment and high inventory remain challenges.
“The market still faces low home-buyer sentiment and high inventory, which needs more time to digest,” said Monica Li, director of research at Fidelity International Ltd.
Bloomberg Intelligence analyst Francis Chan said that Hong Kong’s rate cuts tend to trail the US by six to nine months. He doesn’t expect the prime rate to decline until the terminal rate in the US reaches around 3%.
Even so, the sector’s latest results showed steady growth in earnings from investment properties, which analysts expect to be a key driver of profits for the rest of the year.
“For the next six months, although property prices and sales margin are still facing challenges, we are confident on the steady profit contribution from investment properties,” UOB Kay Hian analyst Jieqi Liu wrote in a note.
The Hong Kong government has also been on a recruitment spree to lure more professionals from mainland via talent programs such as the Top Talent Pass Scheme, which grants two-year visas to job seekers from top universities. The influx of foreign professionals, primarily from China, is expected to lead to higher rents.
--With assistance from Eduard Gismatullin and Roger Yu.
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