It also expects capital outflow in light of the RMB devaluation, which could support asset values in HK.
In a March 3 report, CIMB analyst Lung Siu Fung says the surge in HK stock market activity since February is a proxy for Central office market demand by financial institutions.
On the supply side, Lung expects virtually zero supply in Central.
“The upcoming tender of the Murray Road site will likely be the next “land king” given its scarcity, and many Mainland companies are keen on having a flagship building in HK,” says Lung.
“We believe that the transaction price could be way above market expectation, which could justify a higher valuation.”
To recap, Hongkong Land reported FY16 core profit fell 6% to US$848 million ($1.2 billion) from a year ago, missing both the market and CIMB’s expectations, mainly due to lower property sales recognition.
Hongkong Land’s rental income grew moderately at 1.3%, due to the strong office performance, partly offset by the sluggish high-end retail.
The average rent of Hongkong Land’s Central office portfolio increased from HK$101/sf/mth to HK$103/sf/mth, mainly due to the positive rental reversion of existing tenants.
Vacancy dipped to 2.2% as at Dec 2016, from 3.4% as at Dec 2015, thanks to the strong demand from Mainland companies.
In China, recognised sales increased by 34% in FY16 but profits were flat due to its product mix and RMB devaluation.
Profits from Singapore declined marginally due to lower provision writebacks.
Looking ahead, management expects the increase in property sales in China to offset the decline in Singapore in 2017.
CIMB has a target price of US$7.80.
Shares of Hongkong Land are down 18 cents at US$6.84.
