No mention of farmland conversion; Starter Homes to take time to materialize.    The Policy Address reaffirmed our view that optimism on the new propertymarket initiatives is excessive. In particular, there was no update on theacceleration in farmland conversion. Meanwhile, the “Starter Homes” schemeis still subject to further consultation, the details of which will only be availablein mid-2018 and the pilot site will likely launch by end-2018. While thegovernment announced that “Starter Homes” will be built on developers’landbank or future government land supply, we believe there are no imminentbenefits for developers, as the chief executive signaled that developers will notbe offered lower land premiums as an incentive to participate in the scheme.    Watch out for a potential change in the pricing mechanism for subsidized units.    We believe that the eligibility criteria for “Starter Homes” announced in thePolicy Address (HK permanent residents who have never owned any property,household income cap at HK$68,000/month) are mostly in line with marketexpectations. However, the government hinted that pricing will be linked toaffordability, implying a change in the pricing method for subsidized units. Webelieve the potential change in pricing mechanism may require a completereform of pricing of subsidized units (i.e., a larger discount overall). Based onthe indicated income criteria, we expect “Starter Homes” to likely be priced atHK$5-7.5m, assuming a 20-year loan tenure, LTV of 70%, a prevailingmortgage rate of 2.25% and a debt-servicing ratio not exceeding 50% underthe HKMA stress test. Given the price overlap with the most saleable categoryin the primary market YTD, we see the risk of “Starter Homes” crowding outprivate demand.    Focus on increasing land supply; no update on farmland conversion.    The government reiterated its desire to boost land supply and the Task Forceon Land Supply will likely launch a public engagement exercise in 1H18 toexplore the different land supply options. Aside from residential plots, thegovernment will put up more commercial sites for sale next year, includingland for industrial, logistics and exhibition centers. Moreover, the governmentis exploring reactivating the revitalization scheme for industrial buildings,covering the redevelopment and conversion of old industrial buildings.    However, there was no mention of the potential acceleration in farmlandconversion in the Policy Address.    “Starter Homes” scheme may crowd out private demand; Sell Henderson.    While we generally prefer developers over landlords on valuation grounds, ouronly Buy recommendation in the sector is CK Asset, as we believe it has arobust strategy, with the highest asset turnover among peers. On the otherhand, we have a Sell rating on Henderson Land as we believe the “StarterHomes” scheme will crowd out private demand for smaller units, andHenderson will likely suffer the most as a result as it has the largest salespipeline of small units. Our target prices are based on a sum-of-the-partsapproach. Key risks to our views include policy change and unexpectedfluctuations in the economy (see page 9 for details).

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