Hong Kong's residential property recovery may be slipping out of view. S&P Global Ratings believes that any distress event involving major Hong Kong developers could trigger cascading effects, hitting the financial strength of rated entities and raising the risks of bondholders.

We see growing downside risks to our base case that Hong Kong's home prices will stabilize (see "Hong Kong Residential Property In 2025: Volume Will Rise, Not Price," published on RatingsDirect on Nov. 10, 2024).

Why Are We Talking About This Now?

Speculation is building in the Hong Kong market about credit pressures on some local developers.

Indeed, New World Development Co. Ltd. (unrated) issued announcements on Jan. 20 and Jan. 23, 2025, on the Hong Kong exchange addressing "rumours and speculations in relation to the Group's operations as well as its financial indebtedness." The company added that it was carrying out its businesses as usual and that it had refinanced about HK$17.8 billion of bank loans since July 2024. New World is a major Hong Kong developer and a well-known name among homebuyers.

Investors are asking us how a hypothetical major credit event would affect the wider property market in Hong Kong, and we address that scenario here.

Although rated Hong Kong developers have strong liquidity, the buffers among some unrated developers look thin (see table 5 in Appendix). To replenish their liquidity, some have tapped shareholders for cash injections, or have sold assets (see "Hong Kong's Easing Property Policy Isn't A Quick Fix," March 5, 2024).

However, it's possible that shareholders' willingness to support a developer may wane, and that negotiations on asset sales might fall through. In such scenarios, the weak liquidity positions of some developers may bloom into full-blown financial distress. A credit event, although not our base case, is plausible.

A Major Default Could Have Negative Industrywide Implications

We believe a high-profile default by a major developer would hit market confidence. Prospective homebuyers may delay purchases.

Under this scenario, sales volumes of primary residences in 2025 would fall to about half of our base-case forecast of 20,000 units. Hong Kong's home prices could fall 5%-7% in the year as demand shrinks amid a supply overhang (see table 1).

Table 1

Hong Kong's completed and unsold inventory stood at 27,000 units as at end 2024, according to government data. In our view, Hong Kong developers could likely comfortably cover all their sales this year with inventory held over from 2024.

To put this overhang in context, Hong Kong primary sales peaked in 2019 at 21,108 units. Nevertheless, developers are still building: about 68,000 units of new supply are set for completion over the next three to four years.

Rated Developers Could Face A Further Margin Squeeze

The developers we rate are among the most reputable in the sector, and would likely withstand the aftershocks of a major credit event. However, events would hit margins: we believe entities would cut prices to sustain project sell-through rates and to grab market share.

An industry downturn would hit the sales of less competitive developers harder. This has been the pattern during the declines seen over the past three years.

Nevertheless, a credit event would hit confidence and demand across the sector. All issuers' debt leverage would rise, in our view. We assume rated developers with slim rating buffers would continue to tightly control debt levels, largely by curtailing spending on land and other investments.

Table 2

Funding Conditions May Tighten

If Hong Kong home prices continued to fall in 2025, funding conditions would tighten, which may trigger a credit squeeze.

Banks are one of the biggest sources of funding for Hong Kong developers, and such lending is highly correlated with home prices (see chart 1). Assuming lending to the sector drops in aggregate in a continued downturn, we believe banks would reserve lending for the higher-quality developers.

Chart 1

Rated developers have strong liquidity; a major credit event would not affect their access to bank funding, in our view. Certain unrated entities of a high standing in the market would also likely maintain access to sizable syndicated bank loans. For example, Hang Lung Properties Ltd. (unrated) was able to sign a five-year HK$10 billion syndicated bank loan recently at a competitive cost for the entity.

More Secured Loans, Higher Subordination Risks

Developers that are not able to get unsecured bank loans may need to pledge their assets for financing.

Most bond-offering documents contain negative-pledge clauses that prevent issuers from pledging assets in a fresh borrowing. However, such language usually does not cover secured bank loans.

Some major unrated property firms have only pledged a small portion of their assets (see table 3). We assume, therefore, that secured loans could serve as one of the major sources of incremental funding for names with thin liquidity buffers. An increase in secured borrowings would increase bondholders' subordination risks, as such fundings are unsecured.

Table 3

A Negative Feedback Loop May Kick In

If financially distressed developers cannot obtain secured borrowings, they may need to resort to selling assets at steep discounts as buyers vanish. However, this could be their last resort to replenish liquidity, particularly when refinancing looms.

If developers sold iconic investment properties at steeply discounted prices, the valuations of investment properties owned by healthy Hong Kong property companies might be hit. This would weaken entities' ratios of debt to capital, a metric widely monitored by banks and investors.

A major distress event would require a recalibration of our base-case view. Homebuyers' sentiment may turn sour, prices may again fall, funding conditions may tighten, triggering primary home price cuts by developers and price drops in the secondary home market.

We view the stabilization of Hong Kong's residential property market as something less than robust. Projected cuts to interest rates may falter, homebuyer sentiment seems fragile, and the market faces a supply overhang. Adding a default by a major developer to this mix would be throwing the proverbial cat among the pigeons.

Appendix

Table 4

Table 5

Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).

Writer: Jasper Moiseiwitsch

Digital designer: Evy Cheung

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