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Hong Kong Developers Can Push Through The Unfolding Downturn


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Hong Kong Developers Can Push Through The Unfolding Downturn


Hong Kong's residential property market is heading for a difficult 2024. Our baseline estimate is that home prices will drop by 5%-10% in the year. Softening economic growth, rising interest rates, and oversupply are weighing heavily. But S&P Global Ratings believes that rated Hong Kong developers could weather a price correction of up to 20% without breaching their financial triggers. This severe scenario assumes entities can continue to gain market share, and to trade off margins for volumes.

We previously projected that home prices would rise 5%-8% in 2023; we now assume that prices will fall by 0%-3%. The primary residential market will likely see transaction volume of about 11,000 units this year, a sharp drop from our previous estimate of 15,000-17,000 units.

Most of our rated Hong Kong developers, which are market leaders in this sector, will likely sacrifice margins to meet their contracted sales targets. Their margins will therefore likely shrink in 2023-2025, and this could push up leverage. By our estimate, if home prices fall by 20% in 2024, rated developers' leverage will rise by 0.4x-0.8x in fiscal 2025 or fiscal 2026.

Hong Kong's property market has long ranked as one of the world's most expensive. The local government has for decades taken measures to stabilize home prices, where modest middle-income apartments routinely sell for millions of U.S. dollars. Now, with the Hong Kong residential prices down about 17% over the past two years, policymakers are acting to ease some of the tightening measures.

Weaker Economic Growth And Rising Rates Are Hitting Demand

Hong Kong's economic growth was slower than expected. Our economists revised down Hong Kong's real GDP forecast by 1.2 percentage points for 2023, and 0.2 percentage points for 2024 respectively (see "Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown," published Sept. 24, 2023, on RatingsDirect).

Economic softening, together with rising interest rates (see chart 1), are pulling down home prices and dampening demand. Homebuyers' mortgage burden has climbed sharply.

Historically, homebuyers have favored mortgage plans based on the Hong Kong interbank offered rate (HIBOR) plus a spread (usually 130-150 basis points), given the previously low-interest rate environment. But now that HIBOR has risen sharply alongside a rise in U.S. interest rates, some homebuyers could find mortgage plans more attractive if they involve the prime rate minus a spread (usually 175 basis points). Nonetheless, both HIBOR and prime rates have climbed over the past two years.

Table 1

Prices are falling while volumes are flat
Primary sales for Hong Kong residential market
Price change (%) Primary transaction volume (units)
2023e 0% to -3% 11,000
2024e -5% to -10% 11,000-13,000
e--Estimate. Source: S&P Global Ratings.

For a mass-market home valued at HK$9 million with an 80%-90% loan-to-value ratio, we estimate the annual mortgage payments have increased by over 40% as of September 2023 compared with the beginning of 2022.

Chart 1


After a year of lukewarm sales volume of 10,315 units in 2022, Hong Kong's primary transaction volume will likely remain soft in 2023, hitting around 11,000 units. This will be far below the 15,000-21,000 primary units transacted annually during 2017-2021.

In light of softening home sales, the Hong Kong government on Oct. 25, 2023, relaxed some measures that had been in place since 2010. The steps aimed to cool the property market. Additional stamp duties for second-home buyers and non-local buyers have been halved (see table 2).

People migrating to Hong Kong under various talent admission schemes are also no longer required to pay additional stamp duties upfront. While these policies might stimulate demand somewhat, we expect primary transactions to remain range-bound at 11,000-13,000 units in 2024. Sales volumes will likely not recover to levels set during 2017-2021 as interest rates remain high.

Table 2

The key points Hong Kong's 2023 policy address: Easing stamp duties may moderately stimulate demand
Before After Who benefits?
Special Stamp Duty (SSD) 20% SSD for property disposal within six months after acquisition; 15% SSD for property disposal more than six months but less than one year after acquisition; 10% SSD for property disposal more than one year but less than three years after acquisition Shortens the applicable period of the SSD from three years to two years: if a property owner sells the property two years after acquisition, he/she will no longer need to pay the SSD, which amounts to 10% of the property price Property owner
Buyer's Stamp Duty (BSD) & New Residential Stamp Duty (NRSD) BSD 15%; NRSD 15% Cuts the BSD and NRSD rates by half, to 7.5% Hong Kong Permanent Residents (HKPRs) who have already owned residential properties in their acquisition of another residential property; Non-HKPRs in their acquisition of residential properties
Stamp duty suspension arrangement Stamp duty refund arrangement introduced in 2022 requires that a newly arriving person to Hong Kong pays the BSD and the NRSD at the time of property acquisition; the homeowner will get a refund of that stamp duty after s/he has become an HKPR (which typically requires living in Hong Kong for seven years) Suspends stamp duty payments for new-arrivers to Hong Kong at the time of property acquisition; however, the person will need to pay that duty if he/she is unable to become a HKPR Incoming talents under the designated talents admission schemes including GEP, ASMTP, QMAS, IANG, TechTAS, ASSG and TTPS.
GEP--General Employment Policy. ASMTP--Admission Scheme for Mainland Talents and Professionals. QMAS--Quality Migrant Admission Scheme. IANG--Immigration Arrangements for Non-local Graduates. TechTAS--Technology Talent Admission Scheme. ASSG--Admission Scheme for the Second Generation of Chinese Hong Kong Permanent Residents. TTPS--Top Talent Pass Scheme. Sources: The Government of the Hong Kong Special Administrative Region. S&P Global Ratings.
Demand and supply are imbalanced

As sales volumes declined and new supply held steady, inventory started to build. As of Sept. 30, 2023, primary inventory was 20,483 units.

According to Our Hong Kong Foundation, a non-governmental organization, annual private residential supply will stay high, at 19,000-21,000 units during 2023-2025 (see chart 2). This will also exert pressure on home prices.

Chart 2


Pent-up demand could support home prices when interest rates ease

Hong Kong's residential market could see support if homes prices drop by another 10% while rents rise by another 5% from the September 2023 level, in our view. This would translate into a gross rental yield of about 3.5%-3.6%. This level of rental yield could entice potential homebuyers off the sidelines.

We assume yield on 10-year U.S. Treasuries, one of the most important risk-free rate proxies, to stabilize at 3.6% in 2025-2026 (see "Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted," Sept. 25, 2023). In September 2023, the average gross rental yield for a mass-market residential property that was below 1,000 square feet (sq. ft.) was about 3%.

The divergence in residential rents and prices (see chart 3) suggests that there is real demand for private residential property in Hong Kong. As of September 2023, residential rents have risen by 6.2% from end-2022. Pent-up homebuying demand in Hong Kong could be released when economic growth stabilizes and interest rates ease, in our view.

Chart 3


Scenario Analysis: What If Interest Rates Stay Higher For Longer?

In a scenario in which the 10-year U.S. Treasury stabilizes at a 4% yield in 2025 instead of our baseline forecast of 3.6%, we could see Hong Kong home prices falling 20% from the September 2023 level.

If Hong Kong home prices fall by 20% in 2024, rated developers' leverage (debt to EBITDA) will rise by 0.4x-0.8x from our baseline fiscal 2025 or fiscal 2026 forecasts (see table 3). Although their leverage would still be within financial triggers, some of their rating buffers could significantly diminish.

Our scenario analysis assumes rated developers could sustain their sales volumes amid falling home prices. This is because we expect most of them could gain market share due to their strong brand recognition and abundant mass-market pipeline. For example, Sun Hung Kai Properties Ltd. (A+/Stable/--) was able to moderately grow its contracted sales in Hong Kong to HK$33 billion in fiscal 2023 from HK$30 billion in fiscal 2022 amid soft homebuying sentiment.

However, in a scenario which volumes shrink together with falling prices, rated developers with narrow rating cushions could see downside rating risk.

Table 3

Rated developers have buffer to withstand a 20% drop in home prices in 2024
Debt to EBITDA (X)
Baseline forecast: Fiscal 2025e* 3.0 1.4 6.8
If price drops by 20% in calendar 2024: Fiscal 2025e* 3.4 2.0 7.6
Debt to EBITDA downside trigger 3.5 3.5 Qualitative trigger§
CKA--CK Asset Holdings Ltd. Nan Fung--Nan Fung International Holdings Ltd. SHKP--Sun Hung Kai Properties Ltd. Nan Fung's fiscal year ends March 31; SHKP's fiscal year ends June 30; CKA's fiscal year ends Dec. 31. *Except for Nan Fung, for which the period of reference is fiscal 2026e. §Debt-to-EBITDA ratio much weaker than our base-case expectation. Source: S&P Global Ratings.
What buffers do rated Hong Kong developers have amid this property downturn?

Sizable and growing non-property development income.  The rated Hong Kong property firms are resilient to the current downturn, in our view. Part of that resilience lies in the growing portion of these entities' income from outside property development.

Rental income accounts for about half of the segmental operating profits of Sun Hung Kai The company has a sizable and growing portfolio of investment properties. Over fiscal 2024 and fiscal 2025, we estimate its consolidated rental revenue will increase 3%-8% annually. The completion of new investment properties in Hong Kong and mainland China will drive the uplift.

Other non-property development businesses such as hotels, data centers, telecommunications, infrastructure, and logistics account for 10%-15% of the company's segmental operating profits.

CK Asset Holdings Ltd. (A/Stable/--) and Nan Fung International Holdings Ltd. (BBB-/Stable/--) also derive over 40% of their operating profits from non-property development businesses, by our estimates. The companies will boost their rental income after the completion of investment properties. For CK Asset this includes Cheung Kong Center 2, a grade-A office building in Hong Kong. And Nan Fung has recently completed Airside, a mixed-use investment property in Hong Kong comprised of office and retail space.

No immediate need to buy land.  Amid cautious homebuying sentiment, rated Hong Kong developers will likely remain prudent in their land acquisitions to control their debt level and leverage.

Rated Hong Kong developers, in general, do not have an immediate need to replenish their land bank. For example, we estimate that CK Asset and Sun Hung Kai both have over five years of land bank in Hong Kong.

Strong brand name and abundant mass-market pipeline.  In our view, rated developers with strong brand recognition will hit their targets and gain market share if they launch the right products at the right prices.

In particular, mass-market products with attractive pricing could still achieve a high sell-through rate, in our opinion. Examples of this can be found with CK Asset's mass-market project The Coastline in Yau Tong, a middle-income neighborhood. The company launched the development in August 2023 at an average selling price that matched the seven-year low (referencing prices of neighboring properties). The project achieved first day sell-through rates of 95%-100%.

Conversely, high-end projects have floundered. Recent examples include CK Asset's luxury project on 21 Borrett Road Phase 1 in Hong Kong's upmarket Mid-Levels district. We estimate the developer has sold seven units so far in 2023, with 78 unsold units remaining.

Elsewhere, We estimate Sun Hung Kai has so far this year only sold two units of Victoria Harbour Phase 1 in North Point, another luxury development, so far in 2023, by our estimate.

Rated Hong Kong developers have manageable exposure to property sales in mainland China

The downturn in mainland China's property market will likely not have a major impact on rated Hong Kong developers. For instance, Nan Fung does not have property sales in mainland China. Developments in the mainland only accounted for about 12% of Sun Hung Kai's property sales and 33% of CK Asset's, as of the latest reported fiscal year.

Furthermore, we estimate over 80% of the mainland China property sales of rated Hong Kong developers are in the higher-tier cities, which are more resilient to the downturn in that market (see "China Property Watch: A Slow, Sequential Recovery In 2024," Oct. 15, 2023).

Income outside of home sales

A rebound in retail rent will support rated developers' overall rental income, in our view. Hong Kong retail sales grew 18.6% year on year during the first nine months of 2023, which should support positive rental reversions.

Much of the gains are attributable to the return of mainland Chinese shoppers to Hong Kong, following the end of pandemic-era mobility controls. Visitor arrivals to Hong Kong reached over 23 million in January-September 2023, compared with about 250,000 for the same period in 2022.

Hongkong Land Holdings Ltd. (A/Stable/--), a landlord with high-end retail exposure, saw its average retail rent rise to HK$204 per square foot in the first half of 2023, from HK$168 per square foot a year ago. This is owing to an increase in tenant sales and the removal of temporary rent relief.

IFC Development Ltd.'s (A/Stable/--) retail rental reversions turned positive in the first half of 2023, as its tenants generated better sales. Occupancy of IFC Mall was 96% as of end-June 2023. IFC Mall is an upmarket shopping site in Hong Kong's central business district and the entity's sole retail asset.

Retail landlords with high exposure to neighborhood malls, such as Sun Hung Kai, are also benefiting from improving overall retail sales. Rental income from Sun Hung Kai's rental portfolio grew 5.5% over January-June 2023.

Chart 4


For industrial properties, we believe the limited new supply of high-quality assets will support occupancy and rent levels. Rent levels for private flatted factories rose 5% year on year in August 2023. Goodman Hong Kong Logistics Partnership (BBB+/Stable/--), a logistics warehouse and data center landlord in Hong Kong, recorded 99% occupancy as of end-September 2023.

More negatively for the office landlords, Hong Kong office rents will likely drop 0%-5% in 2024. In our view, office vacancy rates aren't likely to improve meaningfully over the next 12 months amid substantial new supply. That said, rated Hong Kong landlords have lower average office vacancy rates than the market due to their higher-quality premises.

Despite a sustained 10% office vacancy rate in Central, vacancy rates of the office portfolio of our rated landlords remain low. For instance, the occupancy level for the office towers leased by Hongkong Land, IFC Development, and Swire Pacific Ltd. (A-/Stable/--) in Hong Kong's central business district were at the mid- to high-90% range as of June 2023.

Chart 5


Table 4

Financial metrics of major Hong Kong landlords

Goodman Hong Kong Logistics Partnership

The Hongkong Land Co. Ltd.

IFC Development Ltd.

Link Real Estate Investment Trust

Swire Pacific Ltd.

Hang Lung Properties Ltd.

Hysan Development Co. Ltd.

Swire Properties Ltd.

Wharf Real Estate Investment Co. Ltd.
Rating and outlook BBB+/Stable/-- A/Stable/-- A/Stable/-- A/Stable/-- A-/Stable/-- Unrated Unrated Unrated Unrated
Debt/EBITDA (x) 9.4 5.7 5.0 5.6 4.4 6.8 9.7 3.1 5.4
Debt/debt and equity (%) 20.4 15.5 19.8 21.0 17.9 24.5 24.6 7.9 19.3
EBITDA interest coverage (x) 3.3 4.9 11.8 4.9 7.1 4.7 3.2 10.8 7.5
Average cost of debt (%)










Fixed & RMB floating/Non-RMB floating (%)










% of HK office rent in total HK rental income N/A 78 56 3 69 33 46 69 33
% of HK retail rent in total HK rental income N/A 22 29 71 26 59 47 26 65
Ratings as of Nov. 9, 2023. Latest available fiscal year data: Fiscal year 2022 for Hongkong Land, Swire Pacific, Hang Lung Properties, Hysan, Swire Properties, Wharf REIC (year ending Dec. 31) and IFC (year ending June 30); fiscal year 2023 for Goodman HK and Link REIT (year ending March 31). RMB--Renminbi. N/A--Not applicable. Sources: Company disclosures. S&P Global Ratings.

Weak Markets, Strong Players

Hong Kong's property market is certainly experiencing a difficult patch. Rising interest rates are deterring home buyers amid excess supply and soft local economy. While the circumstances are challenging, Hong Kong's rated developers are supported by their low leverage, ample liquidity, prudent financial management, and sizable non-property development income. Their balanced use of fixed and floating rate debt will also help mitigate the hit of rising interest rates (see table 5).

An underpinning of strong real demand could put a floor to the downturn. We believe prospective homebuyers are just reluctant to buy at this juncture, given high interest rates and an uncertain economic outlook. In our view, the current turbulence would have to last longer and exceed our downside scenario to fundamentally erode residential property demand in Hong Kong.


Table 5

Financial metrics of major Hong Kong developers

CK Asset Holdings Ltd.

Nan Fung International Holdings Ltd.

Sun Hung Kai Properties Ltd.

Henderson Land Development Co. Ltd.

Kerry Properties Ltd.

New World Development Co. Ltd.

Sino Land Co. Ltd.

Rating and outlook A/Stable/-- BBB-/Stable/-- A+/Stable/-- Unrated Unrated Unrated Unrated
Debt/EBITDA (x) 1.5 6.3 3.4 13.9 8.9 17.1 1.4
Debt/debt and equity (%) 7.9 26.8 16.3 31.3 32.0 53.5 4.7
EBITDA interest coverage (x) 12.3 2.9 7.5 3.1 4.5 1.4 44.4
Liquidity A/B over the next 12 months 3.5 4.4 3.0 N/A N/A N/A N/A
Average cost of debt (%)







Fixed and RMB floating as a % of total debt




59 45 N/A N/A
Rental income to interest expense 3.2 1.5 4.3 1.8 3.5 0.67 26.8
Ratings as of Nov. 9, 2023. Latest actual FY data: FY22 for CKA, Henderson Land and Kerry Properties (fiscal year ending December 31), FY23 for Nan Fung (fiscal year ending March 31), SHKP, New World Development and Sino Land (fiscal year ending June 30). FY--Financial year. Liquidity A/B over the next 12 months. N/A--Not applicable. *applicable to reported debt only. Henderson Land also has HK$56 billion shareholder's loans that are HIBOR-based. RMB--Renminbi. HIBOR--Hong Kong Interbank Offered Rate. Sources: Company disclosures. S&P Global Ratings.

Writer: Jasper Moiseiwitsch

Digital Designer: Tom Lowenstein

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;
Oscar Chung, CFA, Hong Kong +(852) 2533-3584;
Jay Lau, Hong Kong +852 2533 3568;
Secondary Credit Analyst:Lawrence Lu, CFA, Hong Kong + 85225333517;
Research Assistant:Sylvia Zhao, Hong Kong

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