Weak demand, tighter lenders: Hong Kong property developers face tough 2024

Sun Hung Kai Properties

12/01/2024 07:59

* 
      Funding costs rise as banks cut exposure to property
    

        * 
      House prices expected to continue falling 
    

        * 
      Citi downgrades ratings on several HK property firms
    

  
    By Clare Jim
       HONG KONG, Jan 12 (Reuters) - Hong Kong's property
companies face a squeeze in 2024 from rising funding costs and
sluggish home sales and office rentals, making creditors and
investors cautious about developers’ financial health.
    Some of Hong Kong's major banks have cut off fresh financing
to the city's highly leveraged or weak property companies, four
sources familiar with the matter said, forcing developers to
seek more expensive loans in the private credit market.  
    With the outlook for Hong Kong's once-thriving property
market looking increasingly uncertain, many banks are also
shrinking existing loans or asking developers to top up
collateral, the sources said. 
    As a result, funding costs are expected to increase, and
given sluggish home sales and record high office vacancy rates,
this year could be even more challenging for developers than
last year. 
    Investors don't expect Hong Kong developers to default like
their counterparts in mainland China, but they don't see a
sector rebound any time soon. 
    They are cautious about the outlook, with the Hang Seng
Property Index  .HSNP  having plunged 30% in 2023, and off 60%
from its all-time peak in April 2019.
    House prices are forecast to continue their downward spiral
this year, with UBS and Citi predicting a drop of 10%, following
a 20% decline since the 2021 peak, while vacancy rates of Grade
A office space stand at an all-time high of 16.4%.     
    "Whether some weaker Hong Kong developers have enough of a
cash buffer will depend on the speed of the local economic
recovery, and when rates will start dropping," said UBS analyst
Mark Leung, who expects rate cuts no earlier than the second
half. 
       
    SERIES OF CRISES
    Hong Kong developers enjoyed decades of lucrative growth
until the property market stumbled from one crisis to another,
including anti-government protests in 2019, COVID-19 and a slow
economic recovery at home and in mainland China. 
    Developers' squeezed margins are also the result of surging
funding costs after years of cheap loans. Hong Kong's one-month
HIBOR  HIHKD1MD=  interbank lending rate rose to its highest
since 2007 at 5.66% in November, compared to just 0.2% in the
beginning of 2022. The rate was also close to zero from 2009 to
2017. 
    Despite the challenges, developers are expected to avoid
defaults because they generally have lower debt ratios than
mainland Chinese developers, while some or their parent
companies have very diversified businesses giving them other
sources of income. 
    Still, commercial banks have lowered their exposure to the
sector, worried about developers' repayment capacity, people in
the credit market and real estate industry said. 
    Hong Kong Monetary Authority data shows total loans for
property development and investment started to drop from the
second quarter in 2023, and by the third quarter, they were down
5% from the first quarter.      
    "Private credit providers are now replacing the funding gap
created by the banks," a person in the private credit market
said, adding more developers had been coming to them since last
year because they were unable to borrow from banks. 
    "The credit industry is cautious to the sector, but it's not
across the board. Developers with rich cashflow still have no
problem finding financing, but some highly leveraged developers
are not able to borrow from the market at all," the person said.
    The interest rates for private credit would be 10%-20%
compared to around 6% at banks, according to three sources, and
the loan to value ratio is kept strictly at below 60% to as low
as 30% to provide an additional buffer in case of a further drop
in valuations.     
    
    INVESTORS CAUTIOUS    
    Citi last week slashed the rating and target prices for
several property firms in the finance hub, warning that some
would likely run into negative cashflow this year, partly due to
high capital expenditure.
    Among those downgraded were New World Development  0017.HK 
and Henderson Land  0012.HK , both major homebuilders with the
highest leverage, as well as non-residential plays including
Hongkong Land  HKLD.SI  and Hang Lung Properties  0101.HK .
    Henderson said it is a conglomerate with diversified and 
largely recurring income sources, including property investment
income and profit contributions from its utility unit Hong Kong
& China Gas  0003.HK . It added it has strong backing from its
major shareholder, billionaire founder Lee Shau Kee. 
    Hongkong Land said its core assets remain highly cash
generative, and with a strong balance sheet and selective
deployment of capital towards new projects it has been able to
maintain a stable dividend.
    New World and Hang Lung declined to comment. 
    Among Hong Kong plays in the property sub-index, New World
and Wharf Real Estate Investment Company  1997.HK , a major
retail developer, were the biggest losers in 2023, down 39% and
42%, respectively.     
    Sun Hung Kai Properties  0016.HK , the largest developer by
sales and market value in the city, dropped 21%, while Hang
Lung, whose revenue mostly comes from retail rental in mainland
China, shed 29%.
    JPMorgan said in a research note more hedge funds are
looking for short ideas in the Hong Kong property sector. 
    "Although rates may come down in 2024, most investors do not
feel like right now is the best entry point into Hong Kong
property as the data points such as secondary home prices and
office and retail rents may continue to disappoint," it said. 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Hong Kong will not sell residential, commercial land this
quarter amid slow demand      ID:nL1N3DU0J1 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Clare Jim; Editing by Anne Marie Roantree and
Sonali Paul)
 ((clare.jim@thomsonreuters.com))