Key Takeaways
- We have revised up our 2025 volume forecasts for Hong Kong primary residences on potentially higher investment-driven homebuying demand.
- Home prices should stay flat, however, as developers sacrifice margins to destock. Inventories already exceed our annual demand forecast, and more supply is on the way.
- Rated developers will be cautious in land spending to control debt and leverage. Most of them have such flexibility as they have sufficient land bank.
Hong Kong's home prices should stabilize next year after losing nearly 30% from the 2021 peak. But the pain is not over for developers. They have high inventories and will likely focus on destocking for years to come.
S&P Global Ratings expects primary residential sales volume will rise next year, on easing mortgage rates and market-boosting measures by the government. Developers, however, face further margin pressure because they will be booking residential projects acquired back when land prices were higher.
In our view, most rated developers still have sufficient land bank for development. They could afford to cut land spending to control debt and leverage without endangering their market share for the next one to two years.
Demand Dynamics Are Improving And Will Lift Volumes
Easing mortgage rates and improving rental yields are positives for demand appetite. In addition, the latest government market-boosting measures (see graphic 1) have opened the door a bit wider for investments by funds, companies, and the rich.
Hong Kong's mortgage rates are easing. Mortgage rates in Hong Kong have further room to drop in 2025 given the U.S. Federal funds target rate (Fed funds rate) may fall to 3.00%-3.25% by the end of 2025, from 4.50%-4.75% as of November 2024 (see "Economic Outlook U.S. Q42024: Growth And Rates Start Shifting To Neutral," published on RatingsDirect on Sept. 24, 2024). That being said, the Fed funds rate could be higher than our current forecast if inflation expectations in the U.S. rise (see "After Trump's Win, What's Next For The U.S. Economy?" published on Nov. 7, 2024).
Mortgage rates in Hong Kong have generally dropped to 3.625% from over 4% before the U.S. Federal Reserve's cumulative 75 basis point (bps) cut since September.
Gross rental yields, in general, are still lower than mortgage rates, but the gap is narrowing. This is on back of declining mortgage rates, falling home prices, and rising residential rents--the latter rose more than 5% in the year to September. By our estimates, the gross rental yield for midsized mass-market properties (40-100 square meters) was about 3.3% as at September 2024. For properties under 40 square meters, we estimate their gross rental yield of 4.6% already surpassed the mortgage rates.
Banks in Hong Kong might nonetheless be selective in their mortgage businesses. Although the delinquency ratio (90 days past due) of residential mortgage is low at 0.11% as of end-September 2024, margins on new mortgage loans remain unattractive. For example, Hong Kong interbank rates across different maturities were still above 4% as at end-October, while effective new mortgage rates were generally below 4%.
Graphic 1
Overall funding conditions will also likely improve for developers (see Appendix).
Based on year-to-date transaction volume data, we've moderately raised our forecast of primary transaction volume to around 18,000 units in 2024, from 15,000-17,000 units previously (see "Hong Kong's Easing Property Policy Isn't A Quick Fix For Developers," March 5, 2024).
Given potentially higher investment demand, we expect overall primary transaction volume could further rise to around 20,000 units in 2025 (see table 1).
Supply Will Still Outstrip Demand
Supply overhang will persist for the next few years. Hong Kong's housing inventories stood at 21,000 units as of September 2024 (see chart 1), exceeding annual demand for most of the past five years. The peak demand during that period was only 21,108 units in 2019.
Some 77,000 units of new supply are under construction and set for completion over the next three to four years. This translates into an average additional annual supply of 19,250-25,667 units.
Chart 1
Chart 2
Supply over the next three to four years already meets over 80% of Hong Kong Housing Bureau's target for primary private housing supply over the 10 years until 2035. That includes inventories, homes under construction, and expected new starts that could complete in the next few years.
No Price Rebound In 2025
To clear inventories, we believe Hong Kong developers will continue to adopt conservative pricing strategies. This will hinder a rebound in Hong Kong's home prices.
We are sticking with our forecast of flat prices for 2025 (see "Hong Kong's Easing Property Policy Isn't A Quick Fix For Developers" March 5, 2024). Home prices have dropped about 7.5% in the year to September, in line with our pre-existing forecast of a 5%-10% decline.
Table 1
| Our forecasts for Hong Kong's residential property market | ||||||
|---|---|---|---|---|---|---|
| Price change (%) | Primary transaction volume (approx. units) | |||||
| 2024e | -7 to -8 | 18,000 | ||||
| 2025e | Flat | 20,000 | ||||
| e--Estimate. Source: S&P Global Ratings. | ||||||
Sellers in the secondary market will also price their residential properties conservatively to stay competitive against the primary units. This will also cap the room for home prices to rise in Hong Kong.
The Credit Implications For Developers: Lower Margins, Higher Leverage
The margin squeeze is not over. Our broad-market sample of 20 Hong Kong developers shows that their EBIT margins from property development have fallen to 15% from 43% three years ago. We anticipate further pressure over 2025-2026 as developers book lower-margin residential projects.
Our rated developers have not escaped the margin pain (see chart 4). We expect their weighted average adjusted EBITDA margin will edge down to 34.9% in fiscal 2026 (see chart 4 footnotes) from 36.5% in fiscal 2024.
Chart 3
Chart 4
This margin trend could exert pressure on our rated developers' leverage, as measured by debt to EBITDA. For example, we recently revised our outlook on Sun Hung Kai Properties Ltd. to negative (see "Sun Hung Kai Properties Outlook Revised To Negative On Weakening Property Development Margins; 'A+' Ratings Affirmed," Oct. 7, 2024).
To Tame Leverage, Rated Developers May Remain Selective In Land Acquisitions
To control their leverage, rated Hong Kong developers will likely remain selective in land acquisitions. We believe most of these companies have the flexibility to cut land spending, because they have sufficient land bank in Hong Kong for development for the next five years.
We estimate that Sun Hung Kai Properties reduced its land acquisitions to under 20% of its contracted sales during the past one to two years, down from over 30% in priors years. CK Asset Holdings Ltd. and Nan Fung International Holdings Ltd. have not made notable land acquisitions during 2023-2024.
Recent land auctions also reflect a cautious stance by developers. For instance, Chinachem Group (unrated) acquired a residential land lot in Shatin on Oct. 29, 2024, with an average cost that was 15% below a nearby land lot sold in July 2024. Elsewhere, the Urban Renewal Authority's recent land auction in Kai Tak received only one bid and was ultimately unsuccessful.
Is A Stand-Off On Land Prices Next?
Hong Kong's residential developers could lay low for the next one to two years, in our view. They will focus more on destocking projects from the past, and less on investing for the future.
Given inactive bidding, Urban Renewable Authority, a government-related entity that the Hong Kong government fully owns, is exploring the option to develop a large-scale urban redevelopment in Kowloon City on its own.
We think it might not be realistic for the government to take over too much development in the longer-run. The other option is a further cut in land prices. This is hard to forecast, given the significant revenue role land sales play in Hong Kong's budget.
If land sales don't pick up soon, then Hong Kong's next upcycle might be driven by tight supply. That could be years away though, if it happens at all.
Table 2
| Companies cited in the report | ||||||
|---|---|---|---|---|---|---|
| Developer | Issuer credit rating | Fiscal year end | ||||
|
Sun Hung Kai Properties Ltd. |
A+/Negative/-- | Jun. 30 | ||||
|
CK Asset Holdings Ltd. |
A/Stable/-- | Dec. 31 | ||||
|
Nan Fung International Holdings Ltd. |
BBB-/Stable/-- | Mar. 31 | ||||
|
Sino Land Co. Ltd. |
N/R | Jun. 30 | ||||
| The Wharf (Holdings) Ltd. | N/R | Dec. 31 | ||||
| K. Wah International Holdings Ltd. | N/R | Dec. 31 | ||||
| Kerry Properties Ltd. | N/R | Dec. 31 | ||||
| Wing Tai Properties Ltd. | N/R | Dec. 31 | ||||
| HKR International Ltd. | N/R | Mar. 31 | ||||
| Road King Infrastructure Ltd. | N/R | Dec. 31 | ||||
| CSI Properties Ltd. | N/R | Mar. 31 | ||||
| New World Development Co. Ltd. | N/R | Jun. 30 | ||||
| Lai Sun Development Co. Ltd. | N/R | Jul. 31 | ||||
|
Henderson Land Development Co. Ltd. |
N/R | Dec. 31 | ||||
| Wang On Properties Ltd. | N/R | Mar. 31 | ||||
| Far East Consortium International Ltd. | N/R | Mar. 31 | ||||
| Emperor International Holdings Ltd. | N/R | Mar. 31 | ||||
| Grand Ming Group Holdings Ltd. | N/R | Mar. 31 | ||||
| Star Group Co. Ltd. | N/R | Dec. 31 | ||||
| Kowloon Development Co. Ltd. | N/R | Dec. 31 | ||||
| Data as of Nov. 8, 2024. N/R--Not rated. Source: S&P Global Ratings. | ||||||
Appendix: Developers' Overall Funding Conditions Should Gradually Ease As Home Prices Broadly Stabilize
In our view, the amount of Hong Kong developers' bank funding is correlated to home prices. Residential property development and investment loans (not including mortgages) have fallen by 4.8% in the year ended June 30, 2024. During this time, home prices fell by about 3%-4% (see chart 5).
As we expect home prices to stabilize in 2025, overall funding conditions for developers should gradually ease. In the meantime, we expect lenders will still reserve their quota for developers with solid financial history, satisfactory market standing, and available unpledged assets.
Chart 5
Writer: Cathy Holcombe
Digital design: Evy Cheung
Related Research
- After Trump's Win, What's Next For The U.S. Economy? Nov. 7, 2024
- Sun Hung Kai Properties Outlook Revised To Negative On Weakening Property Development Margins; 'A+' Ratings Affirmed," Oct. 7, 2024
- Economic Outlook U.S. Q42024: Growth And Rates Start Shifting To Neutral, Sept. 24, 2024
- Hong Kong's Easing Property Policy Isn't A Quick Fix For Developers, March 5, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Edward Chan, CFA, FRM, Hong Kong + 852 2533 3539; edward.chan@spglobal.com |
| Wilson Ling, Hong Kong +852 25333549; wilson.ling@spglobal.com | |
| Secondary Contact: | Lawrence Lu, CFA, Hong Kong + 85225333517; lawrence.lu@spglobal.com |
| Research Assistant: | Sylvia Zhao, Hong Kong |
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