Core Viewpoint - Morgan Stanley has downgraded the earnings per share (EPS) forecast for Hang Lung Properties for the fiscal years 2025 to 2027 by 8% due to underperformance in mid-term results and updated expectations regarding property development project pre-sales, completion timelines, rental income, and occupancy rates [1] Group 1: Earnings Forecast - The EPS forecast for Hang Lung Properties for the fiscal years 2025 to 2027 has been reduced by 8% [1] - The current dividend forecast remains unchanged at HKD 1.8 per share for the same period [1] Group 2: Market Conditions - The target price for Hang Lung Properties has been lowered from HKD 31 to HKD 30, reflecting a net asset value discount of approximately 50% [1] - The company is expected to benefit from a stabilization in Hong Kong property prices and improved market sentiment, particularly with anticipated interest rate cuts by the Federal Reserve [1] Group 3: Rental Income and Sales - Stable rental income, dividends from Hong Kong and China Gas, accelerated land recovery, improved residential sales in the second half of the year, and support from major shareholders are expected to sustain dividend distributions [1] - It is projected that Hong Kong residential property prices will remain flat this year, while office and retail rental rates may decline by 5% year-on-year [1]

Core Insights - Despite significant challenges in the past six months, Hong Kong's office leasing and residential markets are showing signs of slight recovery [1] - The overall commercial prices and rents are expected to decline further in the second half of 2025, while low HIBOR will stimulate residential sales [1][2] - The demand for office leasing may benefit from the upcoming IPO wave, while retail leasing activity is expected to remain active despite increasing new supply [1][2] Office Market - The office market sentiment is improving, with increased leasing transactions and negotiations for prime office spaces in core areas, particularly Central [1] - The overall vacancy rate has risen to 13.6%, but specific areas like Wanchai/Causeway Bay and Tsim Sha Tsui have seen vacancy rates decrease to 9.5% and 7.9%, respectively [1] - A positive net absorption of 130,700 square feet was recorded in the first half of the year, driven by increased transactions in major districts [1][2] Residential Market - The residential market lacks clear direction, with factors such as falling HIBOR, rising stock prices, and stamp duty reductions benefiting the market [2] - However, geopolitical uncertainties and high negative equity levels pose significant challenges, with the second-hand market transaction volume expected to rise to about 20,000 units in the first half of 2025, still 22% lower than the average from 2018 to 2024 [2][3] - The supply of new units in the primary market is approximately 93,000, with a projected absorption period of 56.7 months, necessitating price reductions by developers [3] Retail Market - The vacancy rate for core street shops remains at 10.5%, while the vacancy rate for quality shopping malls has reached a new high of 10.5% due to increased supply [3] - Retail landlords are becoming more flexible in lease terms to attract tenants, including offering longer rent-free periods [3] - The upcoming completion of approximately 600,000 square feet of new retail space in the second half of 2025 is expected to exert upward pressure on vacancy rates, with rents projected to decline by 5% to 10% [4]