By Clare Jim

HONG KONG (Reuters) -Hong Kong’s property firms face a squeeze in 2024 from rising funding prices and sluggish residence gross sales and workplace leases, making collectors and buyers cautious about builders’ monetary well being.

A few of Hong Kong’s main banks have reduce off recent financing to town’s extremely leveraged or weak property firms, 4 sources acquainted with the matter mentioned, forcing builders to hunt costlier loans within the personal credit score market.

With the outlook for Hong Kong’s once-thriving property market trying more and more unsure, many banks are additionally shrinking current loans or asking builders to high up collateral, the sources mentioned.

Consequently, funding prices are anticipated to extend, and given sluggish residence gross sales and report excessive workplace emptiness charges, this yr might be much more difficult for builders than final yr.

Buyers do not anticipate Hong Kong builders to default like their counterparts in mainland China, however they do not see a sector rebound any time quickly.

They’re cautious in regards to the outlook, with the Property Index having plunged 30% in 2023, and off 60% from its all-time peak in April 2019.

Home costs are forecast to proceed their downward spiral this yr, with UBS and Citi predicting a drop of 10%, following a 20% decline for the reason that 2021 peak, whereas emptiness charges of Grade A workplace area stand at an all-time excessive of 16.4%.

“Whether or not some weaker Hong Kong builders have sufficient of a money buffer will rely on the velocity of the native financial restoration, and when charges will begin dropping,” mentioned UBS analyst Mark Leung, who expects price cuts no sooner than the second half.

SERIES OF CRISES

Hong Kong builders loved many years of profitable development till the property market stumbled from one disaster to a different, together with anti-government protests in 2019, COVID-19 and a gradual financial restoration at residence and in mainland China.

Builders’ squeezed margins are additionally the results of surging funding prices after years of low cost loans. Hong Kong’s one-month HIBOR interbank lending price rose to its highest since 2007 at 5.66% in November, in comparison with simply 0.2% to start with of 2022. The speed was additionally near zero from 2009 to 2017.

Regardless of the challenges, builders are anticipated to keep away from defaults as a result of they typically have decrease debt ratios than mainland Chinese language builders, whereas some or their mum or dad firms have very diversified companies giving them different sources of earnings.

Nonetheless, business banks have lowered their publicity to the sector, frightened about builders’ reimbursement capability, individuals within the credit score market and actual property trade mentioned.

Hong Kong Financial Authority knowledge exhibits complete loans for property growth and funding began to drop from the second quarter in 2023, and by the third quarter, they had been down 5% from the primary quarter.

“Non-public credit score suppliers are actually changing the funding hole created by the banks,” an individual within the personal credit score market mentioned, including extra builders had been coming to them since final yr as a result of they had been unable to borrow from banks.

“The credit score trade is cautious to the sector, however it’s not throughout the board. Builders with wealthy cashflow nonetheless don’t have any drawback discovering financing, however some extremely leveraged builders will not be capable of borrow from the market in any respect,” the particular person mentioned.

The rates of interest for personal credit score can be 10%-20% in comparison with round 6% at banks, in response to three sources, and the mortgage to worth ratio is saved strictly at under 60% to as little as 30% to supply an extra buffer in case of an additional drop in valuations.

INVESTORS CAUTIOUS

Citi final week slashed the score and goal costs for a number of property companies within the finance hub, warning that some would probably run into detrimental cashflow this yr, partly because of excessive capital expenditure.

Amongst these downgraded had been New World Growth and Henderson Land (OTC:), each main homebuilders with the best leverage, in addition to non-residential performs together with Hongkong Land and Cling Lung Properties.

Henderson mentioned it’s a conglomerate with diversified and largely recurring earnings sources, together with property funding earnings and revenue contributions from its utility unit Hong Kong & China Fuel. It added it has robust backing from its main shareholder, billionaire founder Lee Shau Kee.

Hongkong Land mentioned its core belongings stay extremely money generative, and with a robust steadiness sheet and selective deployment of capital in the direction of new initiatives it has been capable of keep a secure dividend.

New World and Cling Lung declined to remark.

Amongst Hong Kong performs within the property sub-index, New World and Wharf Actual Property Funding Firm, a significant retail developer, had been the most important losers in 2023, down 39% and 42%, respectively.

Solar Hung Kai Properties, the biggest developer by gross sales and market worth within the metropolis, dropped 21%, whereas Cling Lung, whose income largely comes from retail rental in mainland China, shed 29%.

JPMorgan mentioned in a analysis observe extra hedge funds are in search of quick concepts within the Hong Kong property sector.

“Though charges might come down in 2024, most buyers don’t really feel like proper now could be the very best entry level into Hong Kong property as the information factors similar to secondary residence costs and workplace and retail rents might proceed to disappoint,” it mentioned.