Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com The Secretary for Development is considering utilising Land Resumption Ordinance (LRO) to increase housing supply It could help expedite public housing supply and unlock the value of farmland reserve under developers Five key sector picks: SHK Properties, Sino Land, Wheelock, Hang Lung Properties and Swire Properties, all rated Buy Farmland is likely back to the execution agenda. The Secretary for Development is considering utilising Land Resumption Ordinance (LRO) to increase the housing supply via a resumption of farmland reserve, according to HKET (14 Sep). The progress of revitalising farmland was muted over the past two years. In June 2019, the government announced a delay in the launch of the ‘Land Sharing Pilot Scheme (LSPS)’, which was proposed during the Policy Address last October. We believe the ultimate goal of using LRO is to expedite the pace of increasing the public housing supply, which would create a healthier property market by easing the current supply shortage issue. We believe using LRO would also be net positive for property companies as they could unlock the value of their farmland reserves and thus exert less pressure on the private housing segment. Developers with a farmland reserve may replenish their land bank in an easier way, which may result in a lower NAV discount given better medium-term growth visibility. Among developers, Henderson Land (12 HK, CMP HKD38.60, Hold, HKD37.60) and SHK Properties (16 HK, CMP HKD117.20, Buy, HKD145.20) own a sizeable farmland reserve. Three key principles under “Land Resumption Ordinance”. There was a discussion about LRO in the Legislative Council in June 2018 and the three key principles highlighted were: 1) the protection of “the right of private ownership of property”, 2) it is used for an established “public purpose only” and 3) LRO not being a non-exclusive approach for farmland conversion. In other words, land owners are expected to be compensated if the land is resumed to the government. At the same time, the government and developers can help develop both public and private housing units in their respective sites at the same time. What could happen if LRO is implemented? There could be three options, in our view – full resumption of farmland by the government under LRO, partial resumption or no resumption (status quo). We view the option of partial resumption more viable to achieve the goal of increasing housing supply. Under this option, some farmland designated for non-private uses can be resumed for a faster development of public housings or zone planning by the government, while the development of farmland under private residential uses can be expedited by developers if the LSPS or a new regulation is announced in a timely manner. Five key picks. Among the sub-segments, we prefer residential developers to retail landlords. Retail landlords have de-rated significantly over the past three months, and are slowly becoming more attractive valuation-wise. We view office landlords as less attractive given their weak demand outlook. Our key picks are SHK Properties, Sino Land, Wheelock, Hang Lung Properties and Swire Properties. 17 September 2019 Raymond Liu*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited raymond.w.m.liu@hsbc.com.hk +852 2996 6743 Michelle Kwok* Head of Real Estate Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited michellekwok@hsbc.com.hk +852 2996 6918 Ganesh Siva* Associate Bangalore * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Hong Kong Real Estate Equities REMD Hong Kong Revitalising the agricultural reserve Equities ● REMD 17 September 2019 2 Option of using Land Resumption Ordinance – which might work better? The Secretary for Development is considering utilising Land Resumption Ordinance (LRO) to increase the housing supply via a resumption of farmland reserve, according to HKET (13 Sep). We believe the ultimate goal of using LRO is to expedite the pace of increasing the public housing supply, which would create a healthier market by easing the current supply shortage issue. We believe using LRO would also be net positive for property companies as they could unlock the value of their farmland reserves and thus exert less pressure on the private housing segments. Developers with a farmland reserve may replenish their land bank in an easier way, which may result in a lower NAV discount given a better medium-term growth visibility. Among developers, Henderson Land and Sun Hung Kai Properties own a sizeable farmland reserve. We think there could be three options if the government is t...
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