An improving earnings outlook. On average, Hong Kong real estate reported core earnings growth of 9.6% y-o-y in 1H21, compared to a decline of 1.5% y-o-y for 2H20 (Fig 2). We expect the sector earnings growth to continue in 2H21e and reach 8.3%. Many companies have shifted their focus from cash preservation to project acquisition or business expansion, thanks to an improving economic outlook. Companies, including CK Asset, have accelerated the pace of land bank replenishment. The office leasing demand, especially in Central, is picking up and there is an emerging trend of “Re-Centralization” (Back to the office, 16 July 2021). This should offer the sector better earnings growth visibility, and translate into better share price performance. We maintain our constructive view on the sector, and think office landlords offer a better risk-reward perspective than other sub-sectors. We highlight five key observations in 2H21 (Detail on pages 5-10): 1) A return of DPS growth cycle: c.41% of the companies under coverage raised DPS in 1H21, up from 11% in 2H20; 2) Narrowing fair value losses of investment properties: It implies the outlook or profitability of the assets is improving from the challenging situation in 19-20; 3) Diversified rental portfolio drove a faster rent recovery: Companies with commercial assets outside of Hong Kong have helped to offset the weakness in HK retail and hospitality; 4) An improving retail rental outlook: It is supported by a reduction of rent concessions to tenants and a gradual improvement of tenant sales performance within malls; and 5) A ‘flight to quality’ phenomenon within the office market: The occupancy rates among office buildings are diverging – the demand for high-quality office space is rising.

Sub-sector preference – Office > Residential > Retail. We prefer office landlords over other sub-sectors as the worst looks to be over as leasing demand returns. Residential developers could benefit from the housing price rally and enjoy margin expansion. While we expect the retail market to enjoy a positive upcycle for at least the next two years, we see retail landlords as being relatively less attractive, as we think many of the positives are already priced in. Our preferred picks are HKL (HKL SP), Swire Properties (1972 HK), Sino Land (83HK), SHK Properties (16 HK) and Link REIT (823 HK).