Property sector to show moderate growth over the next 12-18 months

Thanks to stable residential sales and commercial rents.

Moody's Investors Service says that the weighted-average EBITDA for Moody's-rated Hong Kong property companies will demonstrate moderate growth over the next 12-18 months, owing largely to strong residential sales and stable rental income.

"These companies' weighted-average EBITDA should grow 5%-10% over the next 12-18 months, because of development earnings from resilient residential pre-sales evident since March 2017, and stable commercial rental income," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

"Overall, most of our rated companies should also maintain their stable rating outlooks over the next 12-18 months, owing to their robust business profiles, diversified operations and stable financial metrics," adds Lau.

Moody's analysis is contained in its just-released report titled "Property — Hong Kong: Stable commercial rents and residential sales will continue in next 12-18 months," and is authored by Lau.

Here's more from Moody's:

Of the nine property developers that Moody's rates, Moody's says that  three — Sun Hung Kai Properties Limited (Sun Hung Kai Properties (Capital Market) Ltd. A1 stable), CK Asset Holdings Limited (A2 stable) and Link Real Estate Investment Trust (A2 stable) — will outperform their peers in terms of EBITDA growth.

With the office segment, Moody's says that the positive rental reversions for the sector will continue but moderate to 0%-5% over the next 12-18 months for Grade-A office space, driven by the marginal increase in vacancy rates over the last few quarters. Moody's says that vacancy rates should stay at or slightly below 5% in the near term.

On the retail market, Moody's expects shopping mall rental rates to register a flat to modest increase of 0%-5% over the next 12-18 months, supported by a gradual recovery in retail sales. Moody's points out that retail sales recorded positive growth for the seven consecutive months to September 2017, and reversed the declining trend that commenced in March 2015.

As for the residential market, Moody's expects primary residential market pre-sales values to stay robust over the next 12 months. Moody's expectation is based on its assessment of modest upward pressure on the Hong Kong dollar interest rate, continual ample interbank liquidity and stable economic conditions. In addition, Moody's does not expect an  immediate increase in housing supply, thereby containing any near-term downward pressure on home prices.

Key credit metrics for Moody's-rated Hong Kong developers should remain stable. Specifically, their leverage levels should fall gradually over the next 12-18 months, and their interest coverage ratios will likely stay stable over the same period. Overall, most of Moody's-rated developers demonstrate solid liquidity, manageable debt maturity profiles and stable operating cash flow.

Key downside risk for the developers is represented by weaker market liquidity conditions, which will raise risk aversion and affect pre-sales sentiments in the residential market.