Hong Kong Builders to Accelerate Sales, Sell New Shares as Loan Costs Rise

Hong Kong builders are accelerating home sales to raise cash and may issue new shares (17) to help finance projects as credit costs rise amid tightening liquidity at the city’s lenders, according to Barclays Capital Research.

“The cheap corporate credit enjoyed by Hong Kong developers is ending,” the brokerage’s Hong Kong-based analysts led by Andrew Lawrence and Tom Quarmby wrote in a report yesterday. “Higher funding costs are clearly a further negative for the property sector.”

Hong Kong banks (11) are tightening credit to the real estate industry as loan demand from Chinese companies rises and as the city’s banking regulator ordered them to rein in mortgage lending. Credit costs also climbed after the European sovereign- debt crisis forced some lenders from the region to withdraw from the Hong Kong loan market, the Barclays report said.

Hong Kong developers may need to refinance as much as $6.1 billion of syndicated loans in 2012 and a further $4.9 billion in 2013, the report said. Average pricing of syndicated loans to the city’s biggest companies has risen to about 150 basis points in October from below 50 basis points in 2007, it said.

The Hong Kong Monetary Authority, the city’s de-facto central bank, has asked lenders to keep more reserves as part of their counter-cyclical measures, Chief Executive Norman Chan told reporters in Beijing yesterday, adding that loan growth may slow next year on lower mortgage lending.

Property Index Falls

The Hang Seng Property Index (HSP) rose 0.4 percent at the close in Hong Kong, trimming its loss this year to 28 percent, compared with the 22 percent retreat in the benchmark Hang Seng Index.

Sun Hung Kai Properties Ltd., Hong Kong’s largest developer, and Chinese Estates Holdings Ltd. (127) are among builders that began selling homes at new projects over the last month, while Cheung Kong (Holdings) Ltd., (1) controlled by Hong Kong billionaire Li Ka- shing, will start sales at a development in the Sha Tin district this week.

Developers may put as many as 1,500 new units up for sale this month, exceeding an earlier peak in April, according to Buggle Lau, chief analyst at Midland Holdings Ltd., Hong Kong’s biggest publicly traded realtor.

‘More Competitive’

The increase in new home sales may mean “that developers are increasingly becoming aware of the rising cost of credit and looking to increase their property sales to bring in cash,” said the Barclays analysts, who hold a negative view on the city’s real estate market on expectations fundamentals and valuations may deteriorate. “This of course suggests a more competitive pricing environment.”

Sun Hung Kai fell 0.5 percent to HK$92.05. Cheung Kong, the city’s second-biggest builder, added 0.5 percent to HK$85.15. Hang Lung Properties Ltd. (101), the third biggest, slid 1.3 percent to HK$22.90.

New homes are selling at about 20 percent more than second- hand apartments in the same district, down from 50 percent when housing values peaked earlier this year, said Midland’s Lau. Prices of new and existing homes tend to converge in a downturn.

Home prices in the city have slid to the lowest in more than six months while the value of housing transactions plunged 50 percent in October from a year earlier, after the government raised minimum down-payment requirements, boosted mortgage rates and increased land sales since August 2010 to curb a housing bubble. Hong Kong home prices may fall as much as 30 percent by 2013, according to Barclays’s Lawrence.

No Massive Cuts

Hong Kong’s Financial Secretary John Tsang said home prices haven’t dropped to a “satisfactory” level, the South China Morning Post reported earlier this week.

Hong Kong Chief Executive Donald Tsang said the city’s economy may have slipped into a recession in the third quarter as Europe’s debt crisis roiled markets. Growth may be as little as 2 percent next year after a likely expansion of 5 percent this year, Tsang said in an interview on Nov. 8. That would compare with a 7 percent gain last year.

“Under the current environment developers just want to sell enough to keep their cash flow moving,” said Wong Leung- sing, an associate director at Centaline Property Agency Ltd., Hong Kong’s biggest privately held realtor. “We still haven’t reached the stage where there’s a massive price cut to unload apartments.”

New Share Sales

As credit costs increase, some developers may seek to replenish capital through equity sales. Sun Hung Kai and Henderson Land Development Co., controlled by billionaire Lee Shau-kee, are among those that may turn to investors in the near term because they have the highest estimated gearing among the city’s seven-biggest builders (16), the Barclays analysts said.

New World Development Co., controlled by billionaire Cheng Yu-tung, last month said it plans to raise as much as HK$12.3 billion ($1.6 billion) from a rights offer. The company’s shares have since fallen 20 percent.

“Experience from 2008 and 2009 suggest that an equity issuance is best done early rather than late,” the Barclays analysts wrote. “New World may not be the last developer to raise equity in this cycle.”

To contact the reporters on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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