Bank of America has published a research report indicating that as the Hong Kong residential market bottoms out by mid-2025, a recovery is expected to strengthen in 2026 and extend to the CBD office and high-end retail sectors. The bank forecasts a 5% to 10% rise in Hong Kong residential prices for 2026, followed by a 5% increase in 2027. Bank of America believes sector valuations have normalized, anticipating relatively moderate gains. The bank has raised multiple target prices by an average of 8%, reflecting a more robust residential price outlook and a 50 basis point reduction in capitalization rates to between 4.5% and 5.25%. Based on the potential for earnings recovery driven by a physical market rebound over the next three years, the bank is optimistic about its "Buy"-rated stocks—CK Asset (01113), Swire Properties (01972), and Hang Lung Properties (00101)—while reiterating its "Underperform" rating on MTR Corporation (00066), citing low likelihood of a significant dividend increase due to its substantial capital expenditure plans. The bank identifies Hang Lung Properties, Henderson Land (00012), and Wharf REIC (01997) as having event catalysts in the first quarter. Bank of America notes that comparing current residential prices and stock prices with 2021 levels suggests developers have already priced in a 5% to 10% residential price growth, while landlord stock prices remain significantly below their earnings decline. The bank highlights three stocks with potential first-quarter event catalysts: 1) Hang Lung Properties is expected to announce a new Singapore property fund; simultaneously, the company is anticipated to increase its share buyback by at least $200 million; 2) Investors are divided on whether Henderson Land will cut its FY2025 dividend, which could trigger two-way stock price volatility following the earnings announcement; 3) Supported by declining HIBOR and rising excess rents, the bank expects Wharf REIC's FY2025 dividend to grow by 7%. The bank has downgraded Henderson Land's revenue rating from 7 to 8 and Hang Lung Properties' from 8 to 7. The bank believes earnings recovery will be key to further sector re-rating. Henderson Land is expected to be the only Hong Kong developer to record a significant earnings rebound in FY2026. Overall, CK Asset and Kerry Properties (00683) are projected to lead developer earnings recovery from FY2025 to FY2028, with an average annual rebound exceeding 10%. For landlords, the bank expects Swire Properties and Hang Lung Properties to lead earnings growth annually during the same period.
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