Analysis: Hong Kong property firms scramble to lure buyers as rate hikes loom

Midland Holdings

26/09/2018 07:00

* Banks set to raise benchmark lending rate after expected
Fed
hike this week
    * Ultra-low rates led to 165 pct jump in home prices over a
decade
    * Aggressive mortgage plans of non-bank firms may add to
headwinds
    * Benchmark lending rate to see first hike in Hong Kong
since 2006
 

    By Sumeet Chatterjee and Clare Jim
    HONG KONG, Sept 26 (Reuters) - Spooked by the prospect of
rising interest rates, a slowing economy and a mounting supply
of new apartments, Hong Kong developers are going all out to woo
buyers, offering bigger loans, longer repayment periods and even
discounts for school tuition.
    The aggressive sales pitches - at a time when borrowing
costs are set to surge and property prices are likely to fall by
10-15 percent - could push up delinquencies and weigh on the
financial sector, bankers and analysts warn.
    Close to 900 new apartments were put up for sale in the past
weekend, the most for more than five years.
    Hong Kong is one of the most expensive property markets in
the world, where a one-bedroom 650 square foot flat on the main
island costs an average of $1.48 million.
    Low interest rates, limited supply and big flows of capital
from Chinese buyers resulted in housing prices rising by 165
percent over a decade, prompting repeated warnings from
authorities about asset bubble risks.
    Hong Kong private home prices rose to another record in
July, extending a 28-month run.  urn:newsml:reuters.com:*:nL3N1VF3NE
    In a sign of cooling market, however, August prices in the
secondary market fell 0.3 percent, realtor Ricacorp Properties
said. Another realtor, Centaline, expects total transaction
volumes in September to drop to the lowest since July 2017.
    Rising interest rates could be the needle to prick any
bubble.
    Banks are likely to raise the benchmark prime interest rate
for the first time since 2006 this week following another
expected rate rise by the U.S. Federal Reserve.  urn:newsml:reuters.com:*:nL3N1W71PF
    "Mortgage rates can only go up and quite quickly," said
Alicia Garcia-Herrero, Natixis' chief Asia Pacific economist.
    "The rise in interest rates would have an impact on the
lower end of the market, where households have resorted to loans
from non-banking firms. In other words, it will affect the lower
middle class who have dared to buy but not the mass affluent so
much."
    Hong Kong banking sources said borrowing costs for home
buyers would be gradually raised over the next six to 12 months,
and could touch 3 percent from an average of roughly 2.25
percent now.
    Adding to the headwinds is expectation economic growth will
slow as the trade war between the United States and China
weighs. Nomura for one expects Hong Kong to grow 2.3 percent in
2019, from an estimated 4 percent this year.
    
    TUITION FEE DISCOUNT 
    Hoping to mitigate risks to the financial system from
runaway prices, Hong Kong's de-facto central bank has been
tightening mortgage lending criteria. Last year, it lowered the
maximum amount banks can lend on a property, or loan-to-value 
(LTV) ratio, to about 50 percent from 60 percent a couple of
years ago.
    The tougher down-payment requirements have channelled a part
of the mortgage business to the non-banking sector, including
the financing units of cash-rich property developers that don't
come under the central bank's regulatory supervision.
    Flush with cash from their main property business, some of
these developers are now vying with each other for buyers.
    Sun Hung Kai Properties  0016.HK , Hong Kong's most valuable
developer, for example, is offering 100 percent financing for
its Park YOHO Napoli apartment in the New Territories district,
provided the mortgage is secured by another fully-paid property.
    Sun Hung Kai's deputy managing director Victor Lui said 100
percent financing was aimed at making it easier for buyers to
switch properties. "From our past experience, borrowers of these
loans will repay the mortgage within one year of purchase."
    China Vanke  000002.SZ  last weekend launched the sale of
its Le Pont project in New Territories with LTV of as much as 80
percent, according to its sales documents.
    To further sweeten the offer, the developer is also offering
20 percent discount on tuition fee for a buyer's child for one
year in a neighbourhood pre-school. Also on offer are Adidas
cash coupons worth HK$2,000 ($255) for each unit purchased.
    Quincy Chow, vice-president of operations department for
sales and marketing at Vanke said the company's "products and
different financial benefits" had been received well, and had
resulted in increased number of prospective buyer visits.
    Others are extending the interest-free repayment period to
three years, after which the buyer will have to pay sharply
higher than the prevailing mortgage market interest rates,
according to sales documents and property agents.
    
    HIGHER RATES 
    Mortgage loans provided by the units of developers accounted
for 17.4 percent of the total pre-sale home market in the second
quarter of this year, said Sharmaine Lau, chief vice-president
at mReferral Mortgage Brokerage Services. 
    The ratio, which fluctuates a lot, declined to 9.6 percent
as of end-August.
    "Financing companies lend a higher (LTV) ratio but the rates
are also higher than banks," she said. 
    Some property agents said the recent implementation of a
vacancy tax, which makes developers pay for completed but unsold
units, has also resulted in renewed push by developers to lure
buyers with attractive offers.
    Bankers, however, warn the generous funding options could
create more risks.
    "It's not sustainable, especially when you are staring at an
increase in borrowing costs and an economic slowdown," said a
senior retail banking executive at a foreign bank, declining to
be named as he was not authorised to speak to the media.   
    For now, however, prospective buyers are not willing to give
up on their obsession with owning property in Hong Kong.
    "This is just the right time, given these incentives being
offered," said David, a 42-year-old finance professional who
declined to give his second name. 
     "Even if the interest rates goes up by a few basis points,
it won't impact much as the rental yields are still high and
Hong Kong will always have a supply shortage," he said at an
apartment sale in Kowloon last month.
    ($1 = 7.8127 Hong Kong dollars)

 (Reporting by Sumeet Chatterjee and Clare Jim. Editing by
Lincoln Feast.)
 ((sumeet.chatterjee@thomsonreuters.com; +852-2847 2094; Reuters
Messaging: sumeet.chatterjee.thomsonreuters.com@reuters.net))