UBS: The Mainland's policy on the renewal of industrial land eliminates valuation uncertainties, significantly impacting Hong Kong developers.
The bank believes that developers can achieve capital recycling through REITs or property transactions. If the increase in valuation can cover the renewal costs, it will have a positive impact on the stock price.
UBS released a research report stating that Guangzhou and Shanghai have successively announced formal policies for the renewal of usage rights for commercial and industrial land, marking the first systematic specification of renewal details in mainland China. The policy stipulates that the renewal price shall not be less than 70% of the benchmark land price, with the maximum renewal term being 20 years. UBS believes this move eliminates uncertainties in the valuation of commercial properties, the splitting of REITs, and the trading of physical assets, which has a positive impact on the market.
The report points out that the usual term for commercial land grants is 40 years, and as the remaining term falls below 20 years, the depreciation of asset valuation will accelerate. Since Hong Kong developers entered the mainland market earlier, the properties they hold tend to be older, resulting in a more significant impact. UBS estimates that among the developers covered, approximately 9% of the total asset value (GAV) of investment properties have less than 20 years remaining on their land term, with HANG LUNG PPT (00101) having the highest proportion at 35%; WHARF HOLDINGS (00004) at 11%; SWIRE PROPERTIES (01972) at 10%; KERRY PPT (00683) at 6%; and LINK REIT (00823) at 5%.
UBS analysis indicates that the mainland REITs market currently has 48 commercial properties, and data shows that the capitalization rate is highly negatively correlated with the remaining lease term of the property. The bank believes that developers can conduct capital recycling through REITs or property transactions, and if the increase in valuation can cover the renewal costs, it will have a positive impact on stock prices. The report cites the example of Tianjin Grandjoy Holdings Group, which renewed its land term in advance, extending it by 16 years, estimating that this could increase the property valuation by about 18%.
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