Asia Property How to Position for Falling Interest Rates-110386641

MAsia Pacific InsightAsia PropertyHow to Position for Falling Interest RatesMorgan Stanley Asia Limited+Praveen K ChoudharyEquity Analyst Praveen.Choudhary@morganstanley.com +852 2848-5068 Morgan Stanley MUFG Securities Co., Ltd.+Atsuro TakemuraEquity Analyst Atsuro.Takemura@morganstanleymufg.com +81 3 6836-5429 Toshiyuki AnegawaEquity Analyst Toshiyuki.Anegawa@morganstanleymufg.com +81 3 6836-8914 Morgan Stanley Australia Limited+Simon ChanEquity Analyst Simon.Chan@morganstanley.com +61 2 9770-1316 Morgan Stanley Asia (Singapore) Pte.+Wilson W Ng, CFAEquity Analyst Wilson.W.Ng@morganstanley.com +65 6834-6345 Morgan Stanley Asia Limited+Stephen Cheung, CFAEquity Analyst Stephen.Cheung@morganstanley.com +852 3963-0385 Morgan Stanley MUFG Securities Co., Ltd.+Takuya SatoEquity Analyst Takuya.Sato@morganstanleymufg.com +81 3 6836-8913 Morgan Stanley Asia Limited+Jeffrey Mak, CFAEquity Analyst Jeffrey.Mak@morganstanley.com +852 2239-7044 Morgan Stanley Australia Limited+Lauren A BerryEquity Analyst Lauren.Berry@morganstanley.com +61 2 9770-1359 Morgan Stanley Asia (Singapore) Pte.+Derek ChangEquity Analyst Derek.Chang@morganstanley.com +65 6834-6512 Morgan Stanley Asia Limited+Cara ZhuEquity Analyst Cara.Zhu@morganstanley.com +852 2848-7117 Lower rates are intuitively positive for real estate but will have an uneven impact across Asia property markets and stocks. We see a higher benefit to earnings and valuations in DM. Falling mortgage rates to offer greater support to HK than SG. We identify key stocks to own and avoid in new cycle.Lower rates a tailwind for property: Our economists see the Fed cutting rates by 25bps in each meeting from September, for a cumulative 175bps. Historically, real estate is a beneficiary of lower interest rates as it drives mortgage rates down (increasing affordability) and such business models involve higher leverage. However, we see varying degrees of impact on earnings and multiples across Asia property.DM to benefit more than EM: We expect the lower rates cycle to benefit DM (HK, Singapore and Australia) more than EM (China and India). Many DM stocks trade on their dividend yield (a function of earnings) and could rise if rates are falling. DM stocks are also sensitive to their asset and book values, which can rise if cap rates fall. By contrast, EM stocks are more driven by local demand/supply and regulations. Japan is somewhat unique in the sense that its interest rates are expected to rise.Housing market outlook - HK over SG, India over China: Rates have been a key driver of HK's 30% home price decline since mid-2021. Improving affordability and diminishing negative carry should drive HK home prices to bottom and show a cyclical recovery of +5% in 2025. Meanwhile, falling mortgage rates are unlikely to support residential sales in SG. We expect a 5% price drop in 2025 due to tight financing regulations and high stamp duties, fewer public-housing upgraders, and more supply. With