The Hong Kong property developers we rate will have to hold tight a little longer. Home prices will continue to fall in 2024, before stabilizing in 2025, with oversupply persisting for the next one to two years. Aggressive price cuts by liquidity-strained developers may hit cash flows, weakening profitability and leverage.

Rated developers have strong liquidity and may benefit from bank lenders focusing on top-quality borrowers when the property market downturn deepens. This is also likely to shield them from the liquidity stress of a nonrated developer.

Prices To Fall As Supply Rises

We expect home prices to fall 5%-10% in 2024 due to increasing supply and high interest rates (see "Hong Kong Developers Can Push Through The Unfolding Downturn," published on RatingsDirect Nov. 7, 2023).

As of the end of February, home prices have declined by about 1% from the end of 2023. Cumulatively, home prices have fallen by 24% since the peak in August 2021. The Hong Kong Housing Bureau estimated in December 2023 that the supply of primary private housing would rise to 109,000 units for the next three to four years. This compares with its estimate of 80,000-100,000 units during 2015-2021.

Chart 1

The Hong Kong government recently eased property-cooling measures such as the removal of additional stamp duties for second-home or foreign buyers. In our view, this may stimulate housing demand somewhat, but high interest rates will keep a lid on any significant demand surge.

Given the policy easing, we have modestly revised upward our forecast of primary sales transaction volume to 13,000-15,000 units in 2024 (from the previous 11,000-13,000 units.) Even if demand recovers to its recent high of 21,000 units in 2019, the supply over the next three to four years will exceed demand.

Table 1

Home prices may start to stabilize in 2025 on expectations that interest rates are peaking and may ease. We forecast flat home prices in 2025 and an increase in primary sales transaction volume to 15,000-17,000 units. As of the end of 2023, we estimate the average gross rental yield for Hong Kong's mass residential properties (under 1,000 square feet) to be about 3.3%.

Table 2

If home prices drop by 10% in 2024, and residential rents remain at current levels, we estimate the average gross rental yield for these properties could reach about 3.7% by the end of 2024.

S&P Global Ratings expects the U.S. Federal Reserve will cut the Fed funds rate by 25 basis points (bps) in June and collectively 75 bps by the end of 2024. Compared with the average mortgage rates of about 4.1% currently, such rental yield level might entice some homebuyers off the sidelines.

Downside Risks Remain

Hong Kong residential developers will face a weak market in 2024. Sales volume will likely be below the historical trend of 15,000-21,000 units sold annually from 2017 to 2021.

There are also downside risks to our home price expectations. We believe developers under financial strain may slash prices to generate cash flows for debt servicing. One example is Allegro, a mass-market project in Kowloon City owned by Country Garden, a financially troubled China-based developer. Allegro's prices dropped 25%-30% for its launch in January 2024, a sharp decrease compared with its launches in mid-2023.

If price discounting becomes widespread, our home price forecast for 2024 may not hold. The lower cash generation could strain the profitability and leverage of the developers we rate.

An additional strain is the downturn in mainland China's residential property market. We believe this could exert leverage and liquidity pressure on Hong Kong developers that have significant exposure to the mainland market. (See "China Property Watch: A Slow, Sequential Recovery In 2024," Oct. 15, 2023.)

In our view, rated Hong Kong developers have manageable exposure to property sales in mainland China. For instance, Nan Fung does not have any property sales there. In the last fiscal year, mainland China sales accounted for about 12% of total sales for Sun Hung Kai Properties Ltd. and 33% for CK Asset Holdings Ltd.

Table 3

Curbing Leverage To Offset Downside Risk

We believe rated Hong Kong developers will attempt to control leverage in two key ways.

First, prudent land acquisitions.

In general, we believe rated Hong Kong developers have no immediate need to replenish their land banks. For example, we estimate both CK Asset and Sun Hung Kai Properties should have about five years of land reserves in Hong Kong.

Second, using sizable sales proceeds from their mass-market flat launches in Hong Kong to reduce debt.

For example, Sun Hung Kai will receive more than HK$20 billion of sales proceeds in the next few months, mainly from its mass-market flat launches in 2023 such as NOVO Land and University Hill.

Reputation And A Mass-Market Pipeline Will Help Restore Liquidity

Reputable developers with strong mass-market pipeline will be better placed to replenish their liquidity. In the current buyers' market, quality is as important as price. Typically, developers with weaker market positions see lower sell-through rates even for their mass-market flat (see table 4).

For instance, in December 2023, Sun Hung Kai launched Yoho West, a mass-market project in Tin Shui Wai. The project achieved a 97% sell-through rate on its first launch date. In March 2024, Henderson Land Development Co. Ltd. launched Belgravia Place, a mass-market project in Kowloon. It achieved 100% sell-through for the first batch of 138 units on the launch date.

Such sell-through rates are much higher than the market average of 48% in 2023 (2022: 53%; 2021: 70%), according to data from Midland Holdings, a real-estate agency based in Hong Kong.

Table 4

Selling high-end projects can be tougher. Despite being offered by top developers, recent projects such as La Montagne at Wong Chuk Hang and SouthSky at Kai Tak were unable to achieve high sell-through rates. These projects, with an average selling price of more than HK$20,000 per square foot, struggled in the current market (see table 5).

Table 5

Flight To Quality Will Benefit Established Players

Homebuyers are particularly vigilant about quality, especially in a saturated market. They will choose developers with a long history and strong market positions. This is especially so given that the government's regulatory buyer-protection schemes don't cover the quality of interior fittings, appliances, and materials.

Government regulations in Hong Kong assure the risk of non-delivery is low. The Lands Department Consent Scheme and the Law Society of Hong Kong's Non-Consent Scheme protect buyers by regulating the sale of incomplete units.

Financing Conditions Will Tighten As Home Prices Fall

The Hong Kong property sector's funding will slowly tighten until prices stabilize in 2025. While many Hong Kong developers continue to secure bank funding, which is their major debt funding source, the overall downward trend in loans outstanding suggests that lenders are increasingly cautious, in our view. We believe lenders are reserving their quota for developers with a solid financial history, satisfactory market standing, and available assets.

The amount of bank funding, in our opinion, strongly ties to home prices. If home prices fall more than we anticipate, developers in Hong Kong, especially those with tight liquidity and shorter track records of operation and financial management, may need to find new ways to fill funding gaps.

Property development and investment loans (excluding mortgages) have fallen by 5% from the second quarter of 2022 to the end of 2023. During this time, home prices fell by 18%. Loans to this sector fell by 19% over the six years from the end of 1997 to the end of 2003. In the same period, home prices fell by 60% (see chart 2).

Chart 2

Rated Developers Have Strong Liquidity

The developers we rate have continued to receive bank funding over the past year. They have substantial liquidity and are well placed to benefit from lenders focusing on top-quality developers. Some of our rated developers are also able to tap the offshore Chinese renminbi bond market at competitive interest costs. Over the next 12 months, we expect their liquidity sources to be 1.8x-3.7x their uses.

Table 6

In the case of nonrated developers with a slim liquidity buffer, there are other ways to counterbalance this issue. We do not forecast unrated developers' liquidity sources, such as operating cash inflow, or their liquidity uses, such as construction expenditure. Instead, we assess their liquidity by focusing on their short-term debt.

We note that 12 developers have a cash to short-term debt ratio below 1.2x, hinting at a lean liquidity buffer. Alternative factors such as banking relationships and asset pledges can offset this, in our view.

Table 7

We see several ways developers could increase their liquidity. These include:

• Committed undrawn bank facilities;
• Unpledged investment properties;
• Shareholder support; and
• Asset disposals.

Developers such as Henderson Land Development and New World Development have established banking relationships over decades of operation in Hong Kong. Such ties allow them to tap unused banking facilities to increase their liquidity.

Developers such as Sea Holdings, Road King, Far East Consortium, and Emperor International have secured funding by pledging between 58% and 85% of their investment properties. Henderson Land Development and New World Development, in contrast, have pledged only 0%-24% of their investment properties, which is indicative of their strong negotiating clout with lenders.

Developers Could Also Look To Asset Sales And Shareholders' Support

Asset sales are common and include land, office buildings, commercial shops, and in some cases, toll roads.

Controlling shareholders of Hong Kong developers have grown their wealth over the past decades thanks to rising home prices. We think many of these shareholders are financially strong to support their developers, which are their main investment. These shareholders have made capital contributions and bought assets from their development arm to support their liquidity and operations.

Table 8

Table 9

If Hong Kong's property prices continue to fall, developers may struggle if they have insufficient liquidity or other means to offset the impact. Although the recent relaxation of property-cooling measures may stimulate demand, high interest rates and abundant near-term supply will cloud the recovery of Hong Kong's home prices.

Writer: Lex Hall

Related Research

• Capping The Cap Rates: How Hong Kong Office Landlords Are Managing, Feb. 25, 2024
• U.S. Economic Forecast Update: A Sturdy Job Market Keeps Growth Going, Feb. 21, 2024
• Hong Kong Developers Can Push Through The Unfolding Downturn, Nov. 7, 2023
• China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 15, 2023