UBS published a research report stating that following the US Federal Reserve's 25 basis point rate cut and the Hong Kong Monetary Authority's adjustment to the overnight discount rate, Hong Kong banks announced a reduction in their best lending rates by 12.5 basis points to 5.125% (from 5.25%), in line with market expectations. Following this adjustment, new residential mortgage rates will decrease from 3.5% to 3.375%. According to CME data, the market expects the Fed to cumulatively cut rates by 142 basis points by December 2026. HSBC recently launched a 2.73% fixed-rate mortgage plan for 3-year or 5-year terms, reflecting that actual mortgage costs may fall to approximately 2.7% by the end of 2026. Based on the latest rental yield of 3.7%, the positive spread will widen from the current 20 basis points to approximately 100 basis points.

UBS expects continued rate cuts to support short-term residential transaction volumes, benefiting developers and highly leveraged companies such as SINO LAND (00083), Henderson Land (00012), Hang Lung Properties (00101), and Kerry Properties (00683).

UBS analyzed the correlation between HIBOR and residential transaction volumes (including primary and secondary private residential markets) over the past 29 years using statistical models. The regression results show that every 100 basis point decline in HIBOR is negatively correlated with approximately 8% growth in residential sales volume. As the Fed begins its rate-cutting cycle, UBS expects one-month HIBOR to decline from the current 3.4% to 2.2% by the end of 2025, and further to 1.6% by the end of 2026. Based on this calculation, residential sales volume over the next 12 months is expected to show an additional 14% growth compared to the average level of the past 12 months.

Private residential transaction volumes in the first eight months of 2025 have already recorded 13% to 15% growth. At the current pace, the annualized transaction volume for 2025 is expected to reach 19,400 units (primary) and 38,000 units (secondary), equivalent to 2018-2019 levels.

However, property prices remain weak, with the CCL index basically flat year-to-date, mainly due to sufficient short-term supply. Although developers are launching projects with higher pricing, buyers have low acceptance of significant price increases. For example, Henderson Land's "One Mody" in To Kwa Wan Station and Swire Properties' (01972) Hyde Park in Chai Wan recorded first-round sales rates of only 53% to 55%, with saleable area prices set at HK$17,988 and HK$17,565 per square foot respectively, 13% and 22% higher than comparable secondary market prices in the same areas.

In contrast, projects offering discounts continue to receive enthusiastic responses. New World Development's (00017) "Cullinan West II" residential project in Kowloon City was launched at pricing 6% lower than "One Mody" and was oversubscribed 38 times.

UBS reiterates that property prices will remain stable in 2025, with a possible moderate recovery of 0% to 5% in 2026 after inventory digestion. Among developers, UBS favors SINO LAND, Henderson Land, and Kerry Properties to outperform peers (due to unattractive dividend yields). UBS also prefers Hang Lung Properties, as declining HIBOR will reduce its interest expenses.

UBS raised SINO LAND's target price by 14% to HK$11.2 with a "Buy" rating, reflecting a narrowing of the net asset value discount from 40% to 35%. Supporting factors include strong sales at Harbour Grand and Park Haven; potential reduction in scrip dividend arrangements. The stock currently offers a dividend yield of 5.8%, similar to Hang Lung Properties. UBS believes the market has not fully reflected its HK$49.5 billion net cash advantage, which can support dividend payments and high-margin land bank acquisitions.