JPMorgan picks property plays

JPMorgan picks property plays

11/18/2008, 22:44     [China Daily - Hong Kong Edition]    

JPMorgan prefers such property stocks as Link REIT, Cheung Kong, New World Development, and Henderson Land and believes that these stocks will outperform in the downturn because they are with low beta, low gearing and have low exposure to property.

Buying opportunities should come when property shares drop 10 to 20 percent below the current trading prices, said the investment bank in a statement.

"We do not expect stocks to trade back to the 1998 trough valuation, and we see buying opportunities if shares fall 10-20 percent below the current trading prices, for example, Cheung Kong at HK$60 and Sun Hung Kai Properties (SHKP) at HK$50," the statement said.

"In view of our latest forecasts of -1.3 percent real GDP growth in 2009 and an unemployment rate of 7.3 percent in mid-2009, we lower our property price assumptions," the statement said. "Hong Kong has officially slid into a recession. We expect residential prices to fall 35 percent from the peak in the second quarter this year to June next year," the statement said.

Though JPMorgan expects residential prices to slip, the investment bank said that the current property downturn should not be worse than that during the Asian financial crisis in 1997 and 1998 because current supply and interest rates are much lower.

The bank believes that property companies' strong balance sheet puts them in a better position than they were during the 1998-2003 downturn.

The bank, however, expects further decline in property prices next year to outpace that of rental, and it foresees the rental yield to further expand to 5.4 percent.

"We only expect the decline in residential rents to accelerate at 11 percent in 2009 as the economy deteriorates further with rising unemployment. With the aforesaid yield expansion, we calculate that property prices will drop by 19 percent in 2009," the statement said.

Furthermore, the bank has forecasted that residential prices and rents will drop by 35 percent and 20 percent from their peak, respectively. And it believes mass residential properties will outperform luxury, which should be the hardest-hit segment as the employment outlook for the financial industry is grim.

Going forward, the bank advises investors to stay defensive as the property sector continues to underperform.

And it has downgraded five stocks, namely Kerry Properties, Pacific Century Premium Development, Ka Wah International, Great Eagle and Far East Consortium, accordingly.