[ET Net News Agency, 28 September 2018] S&P Global Ratings today said that the end of
excess liquidity in Hong Kong will likely be the turning point for the property market.
The credit rating agency anticipates prices could drop 5%-10% over the next 12 months,
from the peak in the third quarter of 2018.
Rated developers should have ample buffers to withstand weakened buyer affordability and
debt serviceability, which will almost inevitably follow a hike in interest rates. But
some mainland Chinese companies and other developers that paid high prices for Hong Kong
land in the past one to two years could face negative surprises on margins.
"We believe the solid financial positions and diverse business models of large rated
developers in Hong Kong will provide some protection against a slight market downturn,"
said S&P Global Ratings analyst Cindy Huang. "But not all companies have such strong
footings. The most affected are likely to have high project concentration or be new market
entrants that incurred steep land costs."
As monetary conditions tighten, interest rates will likely continue to rise. This
follows the first hike in 12 years in prime lending rates by major banks on 27 September
2018, by an eighth of a percent.
"Abundant liquidity has been a key factor driving up property prices in Hong Kong, but
this support is now receding. While an interest hike has long been anticipated and the
increase is marginal, it suggests that the decade long ultra-loose monetary conditions are
over," said Huang.
A quick decline in deposit growth stretched the Hong Kong dollar (HK$) loan-to-deposit
ratio to 85% in July 2018 from 77% at the end of 2016. Hong Kong banks are therefore
facing higher funding costs to attract deposits.
Moreover, the aggregate balance, a key indicator of interbank liquidity, dropped
significantly to HK$76.3 billion currently from about HK$180 billion in January 2018,
indicating Hong Kong is no longer in a position of "excess" liquidity and that rates will
swiftly follow the actions of the U.S. Federal Reserve.
The surge in the Hong Kong interbank offered rate (Hibor) in recent months is also a
manifestation of these factors. As rates rise, household debt serviceability will weaken
significantly. According to the Hong Kong Monetary Authority, if rates were to increase by
300 basis points, the debt-servicing burden of households will increase to an index level
of 69.4, from 49.9 at end of June 2018, compared with a peak of 100 in 1998.
The soft prices of recent project launches also signals developers' less-aggressive
stance on pricing and achieving sell through. Following the government's plan for a
vacancy tax in June 2018, developers are even more keen to clear any completed inventory.
Rising supply combined with weaker buyer sentiment due to rising rates and economic
uncertainty from trade wars will likely further dampen property prices. S&P believes large
Hong Kong property developers that are particularly well placed to weather weaker industry
conditions include Sun Hung Kai Properties Ltd. (A+/Stable/--)(00016), CK Asset Holdings
Ltd. (A/Stable/--)(01113), and Nan Fung International Holdings Ltd. (BBB-/Stable/--).
These developers have solid financial positions and diversified business platforms, with
strong recurring income from rental and investments. Any deterioration in the credit
profiles of these companies may result from potential aggressive acquisition of cheap
assets from competitors or low-cost land, rather than through lower earnings or sales.
(KL)