Stress test. 2020 has been another stress test for property developers in Hong Kong. Slower economic activity, lingering geopolitical tensions and COVID-19 have all weighed heavily on the property market, but not so much on the credit and liquidity profiles of the developers, in our view. In last month’s update, Hong Kong property perpetual bonds (9 November), we concluded that Hong Kong property developers were being hit by varying degrees, depending on their relative exposure to different sub-sectors. More specifically, development property fared considerably better than investment property in Hong Kong, while offices held up better than retail and hotels.  Near-term hiccups. While we are likely past the trough of the downturn, given a tentative recovery in GDP – 3% q-o-q growth i n 3Q – the recovery may face some near-term hiccups. For instance, a surge in local cases has led to Hong Kong’s fourth wave of COVID-19 infections. However, we reckon operating uncertainties will gradually clear despite the ongoing challenges and HSBC Economics team expects Hong Kong’s GDP growth to reach 4.2% in 2021e.

Prefer retail. We believe the retail market is better positioned for an economic pick-up as offices should continue to face challenges in terms of rental growth, along with nearterm weakness in the global economy. Assuming inbound tourism remains non-existent for most of 2021e, a recovery in the hotel segment would depend on the latest government subsidy scheme and the formation of travel bubbles in the coming quarters.  In the residential market, home sales should face a mixed outlook given the long border closure, but sentiment in the mass market should remain relatively steady.

What we like. On top of our overweight market preference on Hong Kong, we maintain our cautiously optimistic stance in anticipation of a gradual recovery in overall sector performance. We prefer credits that stand to enjoy consistent investor demand and stronger technical support. Although some property developers are on the road to recovery, their bonds have not fully recovered from the March sell-off. We think this has created a sweet spot and see good entry points for investors. We have buy trading calls on CSIPRO’21 & Perp-22c, EMPINT’22, FAEACO Perp-24c, and NWDEVL Perp-23c.