Citi has released a research report stating that its initial forecast in October 2025 for a mere 3% increase in Hong Kong residential property prices for 2026 has proven overly conservative. The actual price increase for the full year 2025 reached 4.7% (with +1.2% in November and +0.8% in December), and prices have already accumulated a 1% increase since the beginning of 2026. The bank has now revised its forecast for Hong Kong residential property prices in 2026, raising it from a 3% increase to an 8% increase, and anticipates a further acceleration in 2027, marking the start of a multi-year upward cycle. Fundamental supporting factors include: (1) new land supply hitting a 14-year low, falling below sales volumes; (2) a reduction of 10,000 units in salable supply within one year (down 10% as of September 2025); (3) a shift to net absorption starting from 2026 (the first time since 2019), with an expectation of 21,000 new unit sales, while completions are set to decline over the next 2-3 years (only 20,000 units in 2026); (4) an annual increase of 10,000 in non-local student visas, reaching 90,000 by 2026; talent inflow of 160,000 (compared to 180,000 in 2023/24), supporting rental and future demand; (5) a cumulative 20% increase in rents from 2023 to 2025 (+6% in 2025 alone), with an average rental yield of 3.5%; and (6) capital market wealth effects: the Hang Seng Index typically leads property prices by about three months (with a correlation of 79% over the past decade).
Following the market bottom in 2025, Citi holds a more positive view on the further recovery of Hong Kong property stocks in 2026, supported primarily by: (1) the property price upcycle: improving profit margins on new home sales and expanding upside to Net Asset Value (NAV); (2) new home sales volume reaching a six-year high and continuing to grow; (3) listed property developers being leaner: reduced debt, capital expenditure, and financing costs, with active capital recycling aiding cash flow growth and sustaining stable dividends, while still having leverage capacity to support value-accretive new investments; (4) a recovery in investment willingness; (5) potential for further interest rate cuts in Hong Kong (HIBOR expected to fall by 30 basis points in 2026), the US (75 bps cut), and Mainland China (10 bps cut); and (6) smooth transitions in the roles of Chairmen and CEOs at listed companies.
Citi points out that after favoring luxury retail properties in the fourth quarter of 2025, it now prefers the residential sector. The second quarter is traditionally a peak season for the property market, with an anticipated acceleration in asset turnover starting from March. The bank's latest preference ranking for Hong Kong's property sectors is: Residential = Luxury Retail > Central Office > Necessity Retail > Suburban Office.
The bank expects Hong Kong property developers to lead the way in the first half of 2026, benefiting mainly from margin, earnings, and NAV upside (current operating margins are approximately 5-9%), new home transaction volumes at a six-year high, the property price upcycle (estimating that every 1% increase in property prices boosts average NAV by about 0.5% and earnings by about 1.5%), and a narrowing of NAV discounts (currently at 52%, compared to an average of around 40% during past property price upcycles). The bank recommends Sun Hung Kai Properties (00016), Sino Land (00083), and Henderson Land Development (00012).
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