Morgan Stanley: Bullish on Hong Kong Real Estate Recovery, Expects 2026 Home Prices to Rise 8-10%

Overview

This report records key insights from a conference call between Morgan Stanley and Knight Frank experts regarding the Hong Kong residential and office markets. The report indicates that the Hong Kong real estate market is at the early stage of an upward cycle. Although the interest rate environment remains uncertain, accelerated inventory clearance and wealth repatriation have driven market recovery. Institutions maintain an "Attractive" rating for the Hong Kong real estate industry and detail valuation logic and risk warnings for major listed property firms.

Core views

Residential Market: Knight Frank expects mass market residential prices to rise 8-10% and luxury residential prices to rise 5-8% in 2026. Although 2025 luxury home (>USD 10 million) prices increased only slightly by 0.5% year-over-year (still 8% below 2021 highs), wealth is flowing back from Singapore and the Middle East to Hong Kong, supporting high-end demand. Current residential inventory levels remain higher than in 2021 (20,000 units vs 12,000 units), but the absorption cycle has improved significantly, falling sharply from a peak of 23.5 months to 11.7 months, indicating enhanced market absorption capacity. Office Market shows differentiated recovery. Core office rents in Central are expected to rise 8-12% in 2026. Q1 2026 data shows rents for prime Central office space increased 9.2% year-over-year, while Hong Kong Island East rents fell 10.6% year-over-year. Net absorption was primarily driven by Financial Services (BFSI), contributing 44% of total volume, showing clear corporate expansion and "flight to quality" trends. Notably, flexible office space demand is strong, accounting for 18% of total demand. Landmark projects like The Henderson are nearly fully leased, and IGC has attracted significant demand from banks and wealth management companies. Macro and Strategy Views: Morgan Stanley believes recent stock pullbacks may be related to interest rate outlooks. Its macro team expects rates to remain flat in 2026, with two rate cuts in 2027. Based on this, institutions maintain the "Attractive" rating for the Hong Kong real estate industry. Top investment targets include Cheung Kong Holdings (CK Asset), Henderson Land, Sun Hung Kai Properties (SHKP), Hongkong Land, and Link REIT.

Analysis framework

This report adopts an "Expert Interview + Fundamental Verification" analysis approach. First, by introducing frontline data from third-party real estate service providers (Knight Frank), it obtains micro high-frequency data on rents, prices, inventory, and tenant structures to verify the authenticity and structural characteristics of market recovery (such as differentiation between core and non-core areas). Second, combining macro interest rate path predictions (flat in 2026, cuts in 2027), it evaluates the potential impact of financing costs on valuations. Finally, using Sum-of-the-Parts (SOTP), NAV Discount, and Dividend Yield models, it calculates valuations for covered targets based on historical average discount rate deviations (e.g., 1SD or 1.5SD above historical average) to set target prices and derive investment advice.

Methodology notes

• Valuation methodsSOTP Sum-of-Parts Valuation

  Sum-of-the-Parts (SOTP) Methodology

  Valuing each business segment separately (e.g., property development, investment properties, hotels) and summing them up. Commonly used for diversified综合developers, allowing more accurate reflection of value for each asset portion.

• Valuation methodsNAV Net Asset Value Method

  NAV Discount Approach

  Calculate net asset value per share (NAV) and apply a discount to establish the target price. The report mentions using discount rates above historical averages by 1 or 1.5 standard deviations, reflecting expectations for asset revaluation.

• Valuation methodsDividend Yield Method

  Target Forward Dividend Yield Valuation

  For income-generating assets like REITs, infer target stock price by setting a target dividend yield (e.g., risk-free rate + risk premium). For Link REIT, the target dividend yield is composed of US Treasury yields plus a 1.6% spread.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Inventory Clearance Cycle Analysis

  Judge market supply-demand balance by monitoring changes in absolute inventory levels and clearance cycles (Inventory Months). A sharp decline in clearance cycle usually signals price stabilization or recovery.

• Industry/Industrial Analysis FrameworkIndustry Chain Upstream-Midstream-Downstream Transmission

  Tenant Structure and Corporate Expansion Behavior Analysis

  Judge downstream demand drivers and industrial upgrade trends (like flight to quality) by analyzing sources of office net absorption (e.g., proportion of financial services, flexible office demand).

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Cheung Kong Holdings (1113.HK)

  One of the top picks, benefiting from housing price recovery and defensive leverage

  Strengths

  Defensive leverage level, better-than-expected housing price recovery

  Weaknesses

  Adding more geographically diversified assets could deepen conglomerate discount

  Comparison

  More diversified business than pure real estate investors, but risks of capital outflow from pure property segments

  Risks

  Higher and longer duration interest rate environment, rising cost pressures in bars and hotel businesses

• Henderson Land (0012.HK)

  One of the top picks, core business valuation is attractive

  Strengths

  Potential upside from agricultural land conversion exceeds expectations, disposal of non-core assets

  Weaknesses

  Rising shareholder loan balances

  Comparison

  Valuation uses forward NAV discount of 30% (above historical average by 1SD)

  Risks

  Weak new project sales, interest rates higher than expected

• Sun Hung Kai Properties (0016.HK)

  One of the top picks, ramp-up in residential sales and investment projects

  Strengths

  Sustainable recovery in Hong Kong primary residential sales, good clearance of new projects

  Weaknesses

  Macroeconomic risks, intermediate-term interest rate rises

  Comparison

  Valuation uses SOTP, conservative capitalization rate assumption for investment properties

  Risks

  Hong Kong and China residential sales weaker than expected, office and retail rent weakness

• Link REIT (0823.HK)

  One of the top picks, benefiting from yield compression and capital inflows

  Strengths

  Potential rate cuts leading to yield compression, possible Stock Connect inclusion boosting capital flows

  Weaknesses

  Key management transition period longer than expected

  Comparison

  Valuation based on target forward dividend yield of 5.65% (US Treasuries 4.05% + 1.6% spread)

  Risks

  Fed rate cuts slower than expected, further deterioration of Hong Kong retail and office markets

• Hongkong Land (HKLD.SI)

  One of the top picks, benefiting from capital recycling and Hong Kong retail office turnaround

  Strengths

  Capital recycling faster than expected, accretive acquisitions

  Weaknesses

  Core business EBIT challenged, difficulty in finding third-party capital

  Comparison

  Valuation uses SOTP, NAV discount of 20% (above long-term average by 1SD)

  Risks

  Worsening Hong Kong office supply-demand mismatch, stock price already reflects most upside potential

Key data

• Expected Growth Rate of Mass Market Residential Prices in 20268-10%Predicted by Knight Frank
• Expected Growth Rate of Luxury Residential Prices in 20265-8%Predicted by Knight Frank
• Expected Growth Rate of Central CBD Office Rents in 20268-12%Predicted by Knight Frank
• Year-over-Year Change in Prime Central Office Rents in 2026 Q1+9.2%Actual data showing strong recovery in core areas
• Year-over-Year Change in Hong Kong Island East Office Rents in 2026 Q1-10.6%Actual data showing pressure in non-core areas
• Residential Inventory Absorption Cycle11.7 MonthsSignificant drop from peak of 23.5 months, easing inventory pressure
• Current Residential Inventory Volume20,000 UnitsStill higher than 12,000 units in 2021, but lower than peak of 28,000 units
• Office Net Absorption Share - BFSI44%Financial services are the main source of demand
• Office Net Absorption Share - Flexible Office18%Unexpectedly strong demand source
• Year-over-Year Change in Luxury Home Prices in 2025+0.5%End of downtrend, but still 8% below 2021 peaks

Impact & implications

The report believes the Hong Kong real estate market recovery is spreading from residential to office and retail sectors. For investors, the current stock price correction offers an entry opportunity, especially considering that a potential rate cut cycle in 2027 will further reduce financing costs and enhance asset valuations. Preferred targets like Cheung Kong and Henderson, due to their defensive leverage levels and high-quality land banks, are expected to benefit from price recovery; Link REIT benefits from potential yield compression and capital inflows.

Risks

• Interest rates higher than expected or remaining elevated for too long
• New project sales clearance slower than expected
• Macroeconomic risks and regulatory concerns
• Worsening supply-demand mismatch in Hong Kong office market
• Key management transition period longer than expected

What to watch

• Whether actual growth of 2026 home prices and office rents aligns with the 8-12% expectation
• Federal Reserve and Hong Kong Monetary Authority interest rate policy paths, specifically whether cuts materialize as scheduled in 2027
• Sustainability of wealth return to Hong Kong in the luxury residential market
• Expansion momentum of financial services in the office market
• Progress and capital flow direction of major targets (such as Link REIT) inclusion into Stock Connect