[ET Net News Agency, 4 July 2018] Moody's Investors Service said that the Hong Kong
government's newly introduced tax on new vacant private residential units (primary flats)
will have a moderate and manageable impact on Moody's-rated Hong Kong developers.
"Most of the Hong Kong residential developers that we rate either show sufficient
liquidity to absorb the proposed tax, or have enough of a profit cushion to absorb
discounts needed to clear inventory," said Stephanie Lau, a Moody's Vice President and
Senior Analyst.
"Moreover, any risk of a significant fall in EBITDA because of potential price cuts to
clear inventory, or liquidity impact due to the tax over the next 12-18 months, is
mitigated by the companies' diversified revenue streams, including commercial property
rental income in Hong Kong and China, and development income outside of Hong Kong," adds
Lau.
Moody's analysis is contained in its just-released report titled "Property -- Hong Kong:
Tax on vacant primary residential units is manageable for our rated developers," and is
authored by Lau.
Moody's report explains that on 29 June 2018, Hong Kong's Chief Executive, Carrie Lam,
introduced a package of six new initiatives on housing in Hong Kong. One of the key
policies involves the introduction of a tax on new vacant private residential units, if an
Occupation Permit has been issued for more than 12 months and such units have not been
occupied or rented out for more than six of the past 12 months.
The tax aims to encourage developers to pre-sell primary private flats more quickly.
According to government statistics, the number of unsold new private residential units in
completed projects rose to 9,000 units at the end of March 2018 from around 4,000 units at
the end of March 2013.
The tax will likely measure around 5%, so in a scenario where residential prices grow at
more than 5%, the levy could be easily passed on to homebuyers.
Moody's said that the tax will likely have a mild cooling effect on residential property
prices, because developers will be incentivized to accelerate project launches and engage
in more competitive pricing strategies.
Overall, the new tax will not have a material impact on Hong Kong's physical market,
because of the generally low overall private residential vacancy rate - which registered
3.7% at the end of 2017 - and the small number of inventory units held by most developers
relative to their annual sales.
Among Moody's-rated Hong Kong developers, Sun Hung Kai Properties Limited (00016)(Sun
Hung Kai Properties (Capital Market) Ltd., A1 stable), CK Asset Holdings Limited
(01113)(A2 stable) and Nan Fung International Holdings Limited (Baa3 stable) show
relatively greater exposure to the residential property market in Hong Kong compared to
their peers.
These three developers will be compelled to accelerate their residential sales pipelines
that are potentially subject to the new levy. However, the timing of property sales
related to the higher-end market will be more unpredictable.
Moody's pointed out that all three developers show a diversified business profile and
residential product mix, as well as sufficient margin buffer and solid liquidity profiles.
(KL)