Hong Kong's mortgage lenders doing booming business in the shadows

Sino Land

09/07/2017 02:00

* Bank curbs force HK buyers to tap shadow lenders as prices 
rise 
    * Shadow lenders thriving in absence of fin regulator 
overview 
    * Shadow mortgage lending growing by at least 30-40 pct a 
year 
    * Central bank says will continue to monitor mortgage market 
 
    By Sumeet Chatterjee 
    HONG KONG, July 9 (Reuters) - When Horan Fu decided to buy a 
500-sq-foot apartment for HK$7.4 million last year, the biggest 
draw was the developer's offer of 85 percent financing with an 
option to defer interest payments for the first three years.  
    "The interest rate could be a lot higher after three years, 
but there's also a chance that the interest would still be cheap 
because finance companies are competing fiercely," said Fu, who 
works in Hong Kong's financial services industry. 
    "There's risk but there's also an upside. It's a good 
investment opportunity." 
    With traditional financing drying up in Hong Kong at a time 
when property prices are at a record high, home buyers like Fu 
are looking to non-bank lenders, many of them the financing arms 
of developers, to get in on the boom. 
    Under Hong Kong law, these "shadow banks" can loan legally 
as long as interest rates do not exceed 60 percent per annum, 
according to industry officials and an official document seen by 
Reuters.  
    The system is a life-saver for those who have found it 
harder to secure loans, particularly mortgages, due to curbs 
imposed by the central bank to dampen home prices, which are up 
137 percent since the start of the financial crisis in 2008.  
    But it also puts the broader system at risk if property 
prices turn around or borrowers start to default, because many 
of these lenders have themselves raised financing by borrowing 
from big banks or selling bonds. 
    Because they are not banks -- they do not take deposits -- 
shadow lenders in Hong Kong are monitored by the police, and not 
financial regulators.     
    The manager of one such lender said his firm, founded by a 
mainland Chinese entrepreneur, lends on average HK$8 million to 
HK$10 million for a first mortgage and up to HK$300 million for 
a villa, with down payments much smaller than a regular bank. 
    "I can lend you 90 percent for a property, for example, no 
problem," he told Reuters from his office in the Central 
business district, asking not to be named because he was not 
authorised to speak to the media. 
    The share of shadow banks in Hong Kong's mortgage business 
is still small - in the low single digits - but industry 
officials say it is growing fast, up at least 30 to 40 percent a 
year over the last couple of years. 
    That's no surprise given that mainstream lenders like HSBC 
 HSBA.L  and Standard Chartered  STAN.L  have capped mortgages 
at just 51 percent at the end of last year, according to 
Standard & Poor's. 
    That was after the Hong Kong Monetary Authority (HKMA) 
gradually lowered the property financing ratio, raised interest 
rates, hiked the risk capital buffer for new loans and 
discouraged banks from making large loans to developers with big 
mortgage lending operations. 
    "Regulators have got us to this situation," said Richard 
Wong, a professor in the Hong Kong University's school of 
economics and finance. "The money lenders are not deposit-taking 
companies ... but that doesn't mean there is no risk because the 
(property) market could correct." 
        
    MONITORING CLOSELY 
    While non-bank financing companies play a major role in 
mortgage lending in many developed economies, regulators have 
been tightening their scrutiny of these lenders, especially 
after the sub-prime mortgage crisis in the United States. 
    The Hong Kong regulator, the HKMA, told Reuters it had given 
guidance to banks to ensure they boost their "credit risk 
management" when it comes lending to property developers. 
    "The HKMA will continue to monitor the property and mortgage 
markets closely, and will introduce appropriate measures to 
safeguard the stability of the banking system as necessary," it 
said in a statement.      
    In addition to the financing units of developers, another 
1,800 entities have a license to operate in Hong Kong as money 
lenders, the bulk of them in mortgages, double the number five 
years ago, according to the official Companies Registry data.  
    Another 100 firms had applied for a money lender's license 
as of end-May this year, according to a review of data at the 
Hong Kong Companies Registry. 
    Mortgage loans granted by the dozen or so financing units of 
Sino-Land Company Ltd  0083.HK  more than doubled in 2016 from 
the year before to HK$1.02 billion, according to its annual 
report, in a year when turnover nearly halved and profit dived 
by nearly 25 percent. 
    Other top developers, including Cheung Kong Property 
Holdings Ltd  1113.HK , controlled by Hong Kong's richest man Li 
Ka-shing, Sun Hung Kai Properties Ltd  0016.HK  and Henderson 
Land Development Co Ltd  0012.HK  also have financing units. 
    Loans from one of Sun Hung Kai financing arms for its latest 
development in the New Territories started at 80 percent of the 
property price and went up to 120 percent for people who already 
had a home and wanted to upgrade, according to its price list. 
    About 5,000 people applied to buy the 234 units put on sale 
on July 1 in the first phase of the development, where a 
721-sq-feet unit costs as much as HK$10 million. 
    Interest rates from shadow lenders vary widely, but 
typically start at around 5 percent and go up to 20 percent or 
higher, versus 2-3 percent at regular banks, which also lend for 
longer terms of 25-30 years, industry sources said. 
    Sun Hung Kai told Reuters it was always "prudent": "While 
the package helps our buyers, it does not affect the company's 
financial position as the loan exposure is very small and 
well-secured." 
    Sino-Land, Cheung Kong and Henderson did not respond to 
requests for comment.  
    The Hong Kong police, the de-facto regulator, said it did 
not have any data on buyer complaints against non-bank financing 
companies, but added that it maintained a "close liaison" with 
the financial industry. 
    "Enforcement action will be taken by the police if there is 
evidence implicating any money lender engaged in illegal 
practices," it said in a statement. 
    Some bankers and analysts say the growth of shadow banking 
in the mortgage sector could be a ticking time bomb, especially 
if there's a correction in the market, as is widely expected.  
    The potential for defaults was also a concern although the  
delinquency ratio in the main banking sector, at least, remains 
low at just 0.03 percent in May, unchanged from April, according 
to the HKMA's latest available data. 
    Brokerage Nomura expects prices to peak in the first half of 
this year, and said that local economic fundamentals do not 
support further price rises. 
    "(The property market) is very expensive ... it goes up very 
fast, (but) it actually corrects also very fast," said David 
Chiu, chair of realtor Far East Consortium International 
 0035.HK . 
 
 (Reporting by Sumeet Chatterjee; Additional reporting by Venus 
Wu, Clare Jim, Doris Huang and William Ho in HONG KONG; Editing 
by Clara Ferreira-Marques and Sonya Hepinstall) 
 ((sumeet.chatterjee@thomsonreuters.com; +852-2847 2094; Reuters 
Messaging: sumeet.chatterjee.thomsonreuters.com@reuters.net)) 
 
Keywords: HONGKONG PROPERTY/SHADOWBANKING