Busted: Market to suffer from negative consequences of ignoring explicit warnings

Nomura sees 3-5% home price pull back in the next 2 months.

The Hong Kong government announced two new demand-side curbs on Friday, 26 October. Nomura  believes the market had grown too complacent on policy risks, and the just announced extension of the SSD and the newly introduced 15% stamp duty on non-local buyers will trigger NAV discounts to widen anew to to at least their historical mean.

At the physical level, Nomura expects volume to drop by 15-20%, while home prices are likely to pull back by 3-5% in the coming 1-2 months. Volume players such as Midland Holdings and mid-cap property companies that have already exceeded their mid-cycle valuation levels, it said, are likely to be hit hardest

Here's more from Nomura:

Can’t say you haven’t been warned 

Firstly, while the market may be disappointed by the new round of demand-side measures, investors cannot say they have not been warned. Ever since the government rolled out the 10 supply-side measures on 30 August 2012, it had been warning repeatedly that more measures will be introduced if it deemed necessary. 

While the warnings had been explicit, the market had chosen to ignore them and had grown too complacent on the policy risk.

Market was overly complacent, mid-caps NAV discounts to revert to mean For the property stocks, we believe the first level impact is a re-widening of the property companies’ NAV discounts. With many of the mid-cap property stocks having already returned to and exceeded their midcycle discounts, we believe the mid-cap stocks are likely to be hit harder by the just introduced demand-side curbs.

Within the sector, we continue to prefer the large-cap developers such as HLD, CK and SHKP due to the less expensive valuation as well as their mass-market focus.