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Hong Kong Property Companies Have More Breathing Room

Hong Kong's residential property prices will slowly revive in 2023. That's because the removal of COVID restrictions, including the reopening of the border with mainland China, could lift Hong Kong homebuyers' confidence on the back of an improved economic outlook.

S&P Global Ratings expects Hong Kong's residential property prices to rebound by 5%-8% in 2023, after correcting by about 16% in 2022. Supported by solid pent-up demand, primary residential property transaction volume will likely increase to 15,000-17,000 units in 2023, from 10,315 units in 2022.

However, we also tested downside scenarios. If the homebuying demand is weaker than we expect due to deteriorating affordability caused by elevated interest rates, we believe developers may resort to further price cuts to boost sales. Under our stress test where home prices stay flat in 2023 and drop by 15% in 2024, developers could still face risks of rating downgrades.

Home Prices Recover As Growth Resumes

We believe downturns in Hong Kong's residential property prices are mostly correlated with the city's economic weakness (see chart 1).

After a 3.5% fall in real GDP last year, the Hong Kong government now expects it to grow 3.5%-5.5% in 2023, in line with S&P Global Ratings' forecast of 4.2% growth. As of the end of February 2023, residential prices have increased by 4.5% year on year.

Chart 1


Supply Glut Will Limit The Price Recovery

We don't expect home prices to fully recover their 2022 losses in 2023. The property market was sluggish last year; primary residential transaction volume fell by 42% year on year.

By the end of 2022, inventory of primary homes reached a five-year high of 18,491 units (see chart 2). This, coupled with a potential spike in new residential supply in 2024 (see chart 3), will limit the magnitude of home price recovery, in our view.

That said, we believe private home supply over 2022-2026 looks disciplined on an annual average basis, as it will likely be flat from the period of 2017-2021. Furthermore, the home vacancy rate still looks low at 4.1% as of end 2021. As such, we do not see structural risks of oversupply.

Chart 2


Chart 3


Demand To Remain Intact If Product And Pricing Are Right

As the U.S. rate hike cycle continues, Hong Kong's mortgage rates could increase further. This could weaken potential homebuyers' purchasing power. For a mass-market residential unit valued at HK$9 million with 80%-90% loan-to-value, we estimate the annual mortgage payments have increased by about HK$85,000-HK$100,000 since the second half of 2022 due to rising mortgage rates.

The lowered stamp duty on residential property for Hong Kong residents starting Feb. 21, 2023 only partially alleviates homebuyers' financial burden, in our view. This is because the stamp duty reduction for a residential property valued at HK$9 million, where the tax savings is the largest in absolute terms, is only HK$67,500.

In order to attract pent-up mass-market demand, we believe developers will price their launches conservatively. During the first quarter of 2023, top developers such as Sun Hung Kai Properties Ltd. (SHKP; A+/Stable/--) and Wheelock Properties Ltd (unrated) achieved high sell-through of 90%-100% in the first-day launches of their NOVO Land Phase 2B project in Tuen Mun and KOKO ROSSO project in Yau Tong, respectively.

While the prices of NOVO Land Phase 2B look broadly similar to its earlier phases launched in 2022, we estimate the prices of KOKO ROSSO to be about 10% lower than its earlier phase, KOKO Hills, launched in 2020.

Prices could fall even lower for some projects. For example, we estimate the prices of the latest launch of Grand Jete in March 2023, a joint-venture project by CK Asset Holdings Ltd. (CK Asset; A/Stable/--) and SHKP in Tuen Mun, to be 17% lower than its earlier phase launched in mid-2022. As a result, developers' property development margins could drift down in 2023.

We believe full recovery of the high-end residential market will take longer than the mass-market. This is despite a few notable transactions such as SHKP's development at Victoria Harbour, and 21 Borrett Road, originally owned and developed by CK Asset.

Our Stress Case: Developers With Tight Rating Headroom Still Face Downside Rating Risk

Our stress test incorporates a scenario whereby Hong Kong's residential prices would stay flat in 2023 and drop by 15% in 2024.

This could be due to a lower-than-expected homebuying demand if homebuyers perceive mortgage rates would be higher for a longer period. Under such a scenario, we believe developers could further cut prices, especially for their mass-market products, to stimulate demand. Home prices in the secondary market may also fall in tandem.

In such a case, developers with tight rating headroom could risk downgrades. Their debt levels would be 5%-6% above their rating triggers from their latest actual fiscal year (see table 1).

Table 1

Stress Test: Decline In Residential Prices In 2024 Could Pose Downside Rating Risk
Major Developers CKA Nan Fung SHKP Henderson Land Kerry Properties % New World Development Sino Land
Rating & Outlook A/Stable/-- BBB-/Stable/-- A+/Stable/-- unrated unrated unrated unrated
Debt/EBITDA (X)* 1.5 9.8 3.0 14.3 2.9 17.1 0.5
EBITDA/Interest (X)* 11.5 2.3 13.4 3.2 9.8 2.1 267.8
Debt/Debt+Equity (%)* 8% 23% 16% 31% 14% 52% 2%
Could either one of the triggers be breached in FY24§ if home prices fell by 15% by end 2024 from end 2022 N Y Y NA NA NA NA
Cumulative % of debt beyond rating triggers (comparing FY24§ with latest actual FY) NA 6% 5% NA NA NA NA
Downside trigger Debt-to-EBITDA > 3.5x; and EBITDA interest coverage < 10.0x EBITDA interest coverage < 2.5x Debt-to-EBITDA > 3.0x; and EBITDA interest coverage < 7.0x NA NA NA NA
*Latest actual FY ratios; §FY24 for CKA and SHKP, FY25 for Nan Fung (fiscal year ending March 31); % FY21 for Kerry Properties; % if cannot update in time by end of March - by end of FY21. FY--Financial year. Source: S&P Global Ratings.

A Systematic Downturn Isn't Probable

A systematic downturn in home prices driven by mortgage delinquencies looks unlikely. This is because in 2010 the Hong Kong Monetary Authority introduced an income stress test for mortgage borrowers. Under this test, mortgage payments must be less than 50% of lenders' income and below 60% of lenders' income assuming a 200-basis point hike in interest rate.

This could mitigate the non-repayment risk of borrowers. Negative equity cases have been rising since the second half of 2022 due to a decline in home prices. However, the delinquency ratio of mortgages in Hong Kong remains low at below 0.1% by end of January 2023.

During the 2003-2004 down cycle when the delinquency ratio was more than 1%, the mortgage income stress test was not required. Furthermore, Hong Kong's unemployment rate was close to 8% in 2003; this compares with 3.4% in January 2023.

Chart 4


Commercial Property Is A Mixed Bag

Retail malls and hotels will again become growth drivers for landlords in Hong Kong. In January 2023, the number of visitors was 70 times greater year on year, with arrivals reaching about 500,000. Hong Kong's retail sales also increased by 7% year on year, with sales of luxury goods growing 23% in January 2023.

Hongkong Land Holdings Ltd. (A/Stable/--), a landlord with high-end retail exposure, has had double-digit year-on-year growth in tenant sales since the beginning of 2023.

In the case of IFC Development Ltd. (A/Stable/--), the Four Seasons Hotel improved its occupancy rate to more than 50% and its average room rate HK$4,500 in January 2023. This is up from about 40% and HK$3,700 respectively in the second half of 2022.

Retail landlords with high exposure to neighborhood malls, such as SHKP, are also benefitting from the removal of the COVID measures. For example, the decline in the company's gross retail rental income in Hong Kong narrowed to -0.9% year-on-year in the first half of fiscal 2023 (ended June 30, 2023) from -3% year-on-year in fiscal 2022.

For offices, we maintain our forecast of a 5%-10% decline in rents in 2023. We believe office vacancy rate will not meaningfully improve over the next 12 months amid substantial new supply. Landlords are still working assiduously on filling their new office buildings.

For instance, Swire Properties Ltd.'s (unrated) Two Taikoo Place located in Hong Kong Island East had an occupancy of 56% by March 2023 compared with 50% by June 2022. For Henderson Land Development Co. Ltd. (unrated), The Henderson scheduled for completion in 2023 in the Central district was 21% pre-leased by end of 2022.

Hong Kong's Residential Property Market Is Still Far From Fully Recovered

Given the potential supply spike in 2024, we believe further recovery in Hong Kong's home prices in 2024 could be limited. Our base case thus assumes home prices to range bound next year (see table 2).

Hong Kong's residential property market is still far from fully recovered. Developers who have expanded their rating headroom over the past one to two years will need to continue to prudently manage their investments and debt levels to maintain stable credit profiles. Now the COVID shackles are off the real work can begin.

Table 2

Our Base Case Versus Stress Test Scenario For Hong Kong Developers
Base-case residential price forecast (%) Stress test residential price forecast (%)
2023 + 5% to +8% 0%
2024 0% -15%
Source: S&P Global Ratings.

Editor: Lex Hall

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Edward Chan, CFA, FRM, Hong Kong + 852 2533 3539;
Wilson Ling, Hong Kong +852 25333549;
Secondary Contact:Lawrence Lu, CFA, Hong Kong + 85225333517;
Research Assistant:Sylvia Zhao, Hong Kong

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