LAHORE/HONG KONG (Web Desk/Reuters) – Property prices is on a decline in Pakistan which shouldn’t be a surprise. Rising inflation, worsening cost of living crisis and shrinking purchasing power mean people have very little or nothing to spare and investment.
However, the case is different for the affluent – elite or upper middle class, the beneficiaries of widening wealth inequality – as the rising inequality since 2018 in general and 2020 in particular resulted in fewer investors or buyers. Initially, the market didn’t understand the long-term consequences of economic, but the results became visible with the passage of time.
Thus, fewer customers resulted in reduced demand and decrease in prices. But this is not limited to home buyers as absence of economic activity means the commercial properties too faced the same situation. So there are not enough businesses which would buy or rent property.
A perfect example of market saturation.
But this trend is worldwide, including Hong Kong which enjoys the status of most expensive place on earth in terms of property prices.
In this connection, Reuters says 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 having plunged 30 per cent in 2023, and off 60pc 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 10pc, following a 20pc decline since the 2021 peak, while vacancy rates of Grade A office space stand at an all-time high of 16.4pc.
"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 interbank lending rate rose to its highest since 2007 at 5.66pc in November, compared to just 0.2pc 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 cash flow 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 10pc-20pc compared to around 6pc at banks, according to three sources, and the loan to value ratio is kept strictly at below 60pc to as low as 30pc 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 cash flow this year, partly due to high capital expenditure.
Among those downgraded were New World Development and Henderson Land, both major homebuilders with the highest leverage, as well as non-residential plays including Hongkong Land and Hang Lung Properties.
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. 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, a major retail developer, were the biggest losers in 2023, down 39pc and 42pc, respectively.
Sun Hung Kai Properties, the largest developer by sales and market value in the city, dropped 21pc, while Hang Lung, whose revenue mostly comes from retail rental in mainland China, shed 29pc.
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.