Hong Kong home prices will fall a further 10 percent as a pipeline of new developments is met by stalling income growth and looming interest rate hikes, Nomura Holdings Inc. said in a report.
“We are bearish on the physical property market, on a weakening economy, deteriorating affordability, declining retail sales and stagnant real household income growth,” analysts led by Jeffrey Gao wrote in a note Tuesday. Prices will decline over the medium term, the analysts said, without being more specific.
Gao said in an interview earlier this month that a rebound in property prices during the second quarter was just a pause in a multi-year correction. Hong Kong home prices are 9.4 percent below their September peak, having fallen as much as 12.8 percent at the end of March, according to data from Centaline Property Agency Ltd.
Mortgage rates in Hong Kong, which are linked to the Federal Reserve rate via the pegged currency, may rise after Fed Chair Janet Yellen said last week the case to raise interest U.S. rates is getting stronger.
Nomura also sounded a bearish note on Hong Kong’s retail property market, predicting a 5 percent drop in rental returns in fiscal 2017, as tourist arrivals decline and sales fall. Office rents may also fall as much as 5 percent as leasing demand slows, the report said.
Despite the negative outlook, Nomura remains “positive on HK property names overall,” citing their healthy debt levels, solid balance sheets and potential for share buybacks. The analysts’ top picks are Sun Hung Kai Properties Ltd. and Kerry Properties Ltd., which are both trading at a discount to their net asset value.
Sun Hung Kai Properties shares have risen 17 percent this year and Kerry Properties have gained 6.9 percent, outperforming an 11 percent increase by the Hang Seng Property Index.