© Reuters. FILE PHOTO: A normal view of the development website for housing buildings in Hong Kong, China October 24, 2023. REUTERS/Tyrone Siu/File Photograph
By Clare Jim
HONG KONG (Reuters) -Hong Kong’s property firms face a squeeze in 2024 from rising funding prices and sluggish dwelling gross sales and workplace leases, making collectors and traders cautious about builders’ monetary well being.
A few of Hong Kong’s main banks have reduce off recent financing to the town’s extremely leveraged or weak property firms, 4 sources aware of the matter stated, forcing builders to hunt dearer loans within the personal credit score market.
With the outlook for Hong Kong’s once-thriving property market wanting more and more unsure, many banks are additionally shrinking present loans or asking builders to prime up collateral, the sources stated.
Because of this, funding prices are anticipated to extend, and given sluggish dwelling gross sales and report excessive workplace emptiness charges, this 12 months might be much more difficult for builders than final 12 months.
Buyers do not anticipate Hong Kong builders to default like their counterparts in mainland China, however they do not see a sector rebound any time quickly.
They’re cautious in regards to the outlook, with the Property Index having plunged 30% in 2023, and off 60% from its all-time peak in April 2019.
Home costs are forecast to proceed their downward spiral this 12 months, with UBS and Citi predicting a drop of 10%, following a 20% decline for the reason that 2021 peak, whereas emptiness charges of Grade A workplace area stand at an all-time excessive of 16.4%.
“Whether or not some weaker Hong Kong builders have sufficient of a money buffer will rely on the velocity of the native financial restoration, and when charges will begin dropping,” stated UBS analyst Mark Leung, who expects charge cuts no sooner than the second half.
SERIES OF CRISES
Hong Kong builders loved a long time of profitable development till the property market stumbled from one disaster to a different, together with anti-government protests in 2019, COVID-19 and a sluggish financial restoration at dwelling and in mainland China.
Builders’ squeezed margins are additionally the results of surging funding prices after years of low-cost loans. Hong Kong’s one-month HIBOR interbank lending charge rose to its highest since 2007 at 5.66% in November, in comparison with simply 0.2% at first of 2022. The speed was additionally near zero from 2009 to 2017.
Regardless of the challenges, builders are anticipated to keep away from defaults as a result of they typically have decrease debt ratios than mainland Chinese language builders, whereas some or their dad or mum firms have very diversified companies giving them different sources of revenue.
Nonetheless, industrial banks have lowered their publicity to the sector, fearful about builders’ reimbursement capability, folks within the credit score market and actual property business stated.
Hong Kong Financial Authority information reveals complete loans for property improvement and funding began to drop from the second quarter in 2023, and by the third quarter, they had been down 5% from the primary quarter.
“Non-public credit score suppliers are actually changing the funding hole created by the banks,” an individual within the personal credit score market stated, including extra builders had been coming to them since final 12 months as a result of they had been unable to borrow from banks.
“The credit score business is cautious to the sector, however it’s not throughout the board. Builders with wealthy cashflow nonetheless don’t have any drawback discovering financing, however some extremely leveraged builders aren’t in a position to borrow from the market in any respect,” the individual stated.
The rates of interest for personal credit score could be 10%-20% in comparison with round 6% at banks, in keeping with three sources, and the mortgage to worth ratio is stored strictly at beneath 60% to as little as 30% to offer an extra buffer in case of an extra drop in valuations.
INVESTORS CAUTIOUS
Citi final week slashed the score and goal costs for a number of property corporations within the finance hub, warning that some would possible run into detrimental cashflow this 12 months, partly resulting from excessive capital expenditure.
Amongst these downgraded had been New World Growth and Henderson Land (OTC:), each main homebuilders with the very best leverage, in addition to non-residential performs together with Hongkong Land and Hold Lung Properties.
Henderson stated it’s a conglomerate with diversified and largely recurring revenue sources, together with property funding revenue and revenue contributions from its utility unit Hong Kong & China Fuel. It added it has sturdy backing from its main shareholder, billionaire founder Lee Shau Kee.
Hongkong Land stated its core belongings stay extremely money generative, and with a powerful steadiness sheet and selective deployment of capital in direction of new initiatives it has been in a position to preserve a steady dividend.
New World and Hold Lung declined to remark.
Amongst Hong Kong performs within the property sub-index, New World and Wharf Actual Property Funding Firm, a significant retail developer, had been the largest losers in 2023, down 39% and 42%, respectively.
Solar Hung Kai Properties, the most important developer by gross sales and market worth within the metropolis, dropped 21%, whereas Hold Lung, whose income largely comes from retail rental in mainland China, shed 29%.
JPMorgan stated in a analysis notice extra hedge funds are in search of quick concepts within the Hong Kong property sector.
“Though charges could come down in 2024, most traders don’t really feel like proper now’s the perfect entry level into Hong Kong property as the information factors resembling secondary dwelling costs and workplace and retail rents could proceed to disappoint,” it stated.