Hong Kong is on a high. The benchmark Hang Seng index has climbed to a two-year top thanks to inflows from mainland China. And the property market has risen to levels never-before reached.
The headache-inducing property prices create social tensions. New graduates will virtually spend their entire working lives saving to afford an apartment, if they don't have family help. And the city risks becoming a Monte Carlo -- a place where the people who work can't afford a place to stay while they service the residents and their super-high incomes.
But the high prices are good for property companies. Hong Kong property developers and landlords should deliver resilient results this reporting season on the back of an increase in project completions, strong inventory sales and, yes, resilient growth in rental income. Dividend payouts may receive particular investor attention this season, since several companies have the cash flow and reserves to raise their payout.
Hang Lung Properties (HLPPY) and Swire Properties (SWROY) are the best stocks among developers, according to the investment bank Nomura (NMR) . Hang Lung is poised to benefit from its strong portfolio of luxury retail malls in China, with high-end spending performing better than regular retail. Swire, meanwhile, has an extensive portfolio in Central, Hong Kong's equivalent of Wall Street, where rents are by some counts the highest in the world.
Swire Properties looks set to deliver a core profit of HK$4.7 billion ($602 million) for the first half of 2017. That's up 32% from the same period last year, thanks to the completion of its Alassio residential project in Hong Kong's high-end Mid-Levels neighborhood, half-way up Victoria Peak.
Swire also posted strong retail sales from the Shanghai shopping mall HKRI Taikoo Hui, named for its first major property development in Hong Kong. The original sits on the site of the former Taikoo Sugar factory, a brand Swire began back in 1881.
Landlord stocks present steadier, but less-exciting, earnings prospects than developers. Hong Kong property companies inevitably have both development property and completed projects on their books, but with a propensity towards one risk profile or the other.
Sun Hung Kai Properties (SUHJY) and Kerry Properties (KRYPY) are the top picks for developer stocks, according to Nomura. They have strong pipelines for property completions that are bolstered by good rental income, and have a track record of stepping up their dividends.
SHK is by far the largest among the stocks that Nomura covers. Its core profit of HK$25.6 billion ($3.3 billion) should rise 6% for the first six months, according to the bank's forecasts. Kerry should post a core profit of HK$2.2 billion ($280 million), up 53% over the same time last year, because its major residential project Mantin Height started selling in April this year in the upscale Kowloon neighborhood of Ho Man Tin.
That's sold as a luxury residential project. But not all "luxury" in Hong Kong translates into luxury on the ground.
The popular Coconuts website notes that the Seven Victory Avenue project by Henderson Land (HLDCY) , also in Ho Man Tin, has apartments so small, at 190 square feet, that an "adult man of average height can't even close the toilet door." The sofa must serve as the bed in a flat little larger than a corridor.
Henderson's core profit should reach HK$8.8 billion ($1.1 billion) for the first half of the year, up 85% over the same time in 2016, due to a HK$3.3 billion gain from selling the Beijing Henderson Centre, Newton Place Hotel and Newton Inn.
Although most Hong Kongers complain about the city's super-high prices, they are still buying apartments. The top eight developers in Hong Kong contracted sales of HK$82.2 billion ($10.5 billion) in the first half of this year, up 26% from the second half of last year and an eye-popping 79% compared with the same period last year.
While rents continue to rise, retail sales in Hong Kong and China are both struggling to show gains. Hong Kong retail rental income will be "flattish" for Hong Kong-heavy landlords, Nomura says, the situation switching to mild growth for landlords managing malls that cater to day-to-day non-discretionary spending. That's the profile of Fortune REIT HK:0778.
China-heavy retail landlords face even worse working conditions, with sales likely to be on the slide. But the worst has probably come in the 12 months through June, Nomura says, with the operating situation improving since then and the Chinese yuan stabilizing. That both bolsters confidence in the economy and helps depress the popularity of moving money overseas to escape the flagging currency.