Hong Kong property tycoons send warning by waiting

Henderson Land Development Co

22/03/2024 04:02

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, March 22 (Reuters Breakingviews) - Hong
Kong's property market looks ripe for a rebound - if the finance
hub's last major real-estate slide were any guide, that is. Home
prices have slumped 20% over the past two years, helping to drag
valuations of Hong Kong’s real estate blue chip companies to the
lowest since 2003. Back then, it prompted controlling
shareholders-cum-managers like Henderson Land Development's
 0012.HK  Lee Shau Kee and New World Development's  0017.HK 
Henry Cheng to engage in a raft of buyouts and other deals. This
time round, though, property magnates are still on the
sidelines.
    The seven Hong Kong-focused property constituents of the
benchmark Hang Seng Index  .HSI  trade at an average of just 35%
of net asset value, per LSEG, with one of them, New World, at a
lowly 13%. Shares in CK Asset Holdings  1113.HK  fell more than
a tenth in early Friday trading after the $15 billion
developer's core businesses reported a 10% earnings decline for
2023.     
    All are now cheaper than two decades ago, when six years of
deflation after the Asian financial crisis, then the deadly SARS
outbreak, wiped 65% off Hong Kong home prices.
    At the time nearly all real estate majors took the chance to
either take businesses private or restructure undervalued assets
in their listed firms. Both Henderson Land's separately listed
property investment unit, as well as Kerry Properties  0683.HK ,
became buyout targets for their controlling shareholders. New
World shunted a set of undervalued assets into a new unit in a
revamp to cut debt. 
    There were good reasons to be bullish: China’s economy was
on an upward trajectory after becoming a member of the World
Trade Organization. Hong Kong’s property market, meanwhile, was
poised for a strong rebound as Beijing started to lift visa
controls on its own citizens. 
    Now, though, property tycoons are staring at more structural
challenges, such as Hong Kong consumers’ growing preference to
go to Shenzhen for their shopping and leisure needs. Chinese
tourists' tastes are changing, too: many of them are now
spending more time snapping photos of Hong Kong's cultural
heritage than buying luxury goods in large malls. Revenue for
Times Square, the crown-jewel retail asset of Wharf REIC, fell
another 3% last year - and its stock plummeted more than 40% -
despite Hong Kong’s border reopening in early 2023 after the
pandemic.
    Hong Kong's government is trying to inflate the market
again. Last month it removed a bunch of homebuying restrictions
such as special stamp duties that had been in place for more
than 10 years. Lower interest rates in the U.S. and an improving
economy in China would also help. 
    In 2003 property tycoons were a bellwether for the city's
resurgence. Twenty-one years later, by waiting rather than
acting, they and their rivals are sending another strong signal:
the market has further to fall.
    
    CONTEXT NEWS
    CK Asset Holdings, one of Hong Kong's biggest homebuilders,
reported on March 21 an 11.6% drop in its 2023 net profit to
HK$17.3 billion ($2.2 billion) as revenue from property sales
fell by 49% last year to HK$13.2 billion. 
    Home prices in Hong Kong have fallen an average of 20% from
a peak in 2021, according to the Hong Kong government. The slump
has pushed the share price of property companies such as New
World Development to the lowest since 2003. The sector is now
trading at a 65% discount to net asset value, per LSEG. S&P
Global said on March 6 it still expects home prices to fall by
5% to 10% this year. 

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Graphic: Hong Kong developers' price-to-book value    https://reut.rs/4al99e7
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 (Editing by Antony Currie and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com; Reuters Messaging:
KaSing.Chan.thomsonreuters.com@reuters.net))