Hong Kong developers whipsawed by 16-year high inventories, lofty interest rates and China slowdown
- Hong Kong property, which has for years benefited from a combination of low US rates and strong Chinese growth, is seeing a reversal of fortunes
- The city’s inventory of unsold units is the highest since 2007 at a time when there is a strong pipeline of launches and this is one of the reasons behind the rush to cut prices
Dark clouds have gathered for Hong Kong developers as mainland China’s property crisis intensifies at a time when the city’s builders are already grappling with the deadly combination of rising interest rates, an economic slowdown, and a robust pipeline of new office space.
Weakening residential transaction volumes in recent months have doused hopes of a sustained recovery from the pandemic lows as China’s reopening failed to generate the expected inflows. Adding to the sector’s misery were higher mortgage rates, at least a third more expensive compared with a year ago.
“Optimism is in short supply for Hong Kong’s real estate companies in the near term, and earnings are likely to disappoint. The mainland downturn is far from over and authorities remain reluctant to accept that the real estate profit model has changed,” said Brock Silvers, chief investment officer at private equity investment firm Kaiyuan Capital in Hong Kong.
Hong Kong property has benefited from years of low US interest rates and strong Chinese growth but fortunes are in reverse gear now. Hong Kong’s commercial banks raised their mortgage rates by nearly a fifth in the past year and China’s economic troubles has had a swathe of research houses lowering their growth estimates.
In the second quarter of 2023, the stock of unsold residential units rose to 19,085, the highest since 2003 when it had piled up to 22,000 units, according to Centaline Property Agency. Since then, mortgage rates have risen further with the latest round of increments announced last month following the Hong Kong monetary authorities.
“Lower average selling prices and higher interest rates are likely to erode developers’ margins and will have a lasting impact on bookings in the coming one to two years,” Sam Wong, equity analyst at US investment bank Jefferies told the Post. In a recent note, he trimmed earnings estimates of Hong Kong developers across the board, citing margins, higher interest expenses and the yuan depreciation, which factor in the sizeable mainland exposures of some of these companies.
