Hong Kong's Property Boom at Risk With Stocks Flashing Warning Signs

  • Real estate prices highest relative to shares since 1998
  • ``We're just at the beginning of the correction cycle": Lau

Hong Kong home prices are the highest relative to shares of the city’s publicly-traded developers in almost two decades. For Bocom International Holdings Co. analyst Alfred Lau, that’s a sign that the property market’s about to drop as much as 20 percent.

The Hang Seng Properties Index slumped 15 percent this quarter through last week, even as a gauge of Hong Kong housing prices compiled by Centaline Property Agency Ltd. rose to a record. The stock gauge is at the lowest compared with the real estate measure since 1998, when the city’s last property bubble was bursting.

“We’re just at the beginning of the correction cycle for physical property prices,” Bocom’s Lau said. “We expect a 10 to 20 percent decline in prices. Shares are already pricing in a 10 to 15 percent decline."

While home values kept rising in August, sales showed signs of a slowdown. The number of transactions tumbled 37 percent from a year earlier amid concern about China’s economic outlook and the prospect of higher borrowing costs as the Federal Reserve prepares to raise interest rates. Analysts including JPMorgan Chase & Co.’s Cusson Leung and Morgan Stanley’s Praveen K. Choudhary are calling for Hong Kong property prices to slide as much as 10 percent next year.

Stock Valuations

A 20 percent plunge by the property-stock gauge from its June peak dragged valuations to the lowest level relative to the benchmark Hang Seng Index since 2001. The measure of 10 developers trades at 5.9 times reported earnings, compared with the 10.8 multiple on a Bloomberg gauge of global real estate shares.

The Hang Seng Properties index slumped 3 percent on Tuesday, its biggest loss in a month.

The city’s retail sales fell 2.8 percent in July from a year earlier, and shop rents are declining. UBS Group AG lowered its target for Hong Kong’s benchmark stock gauge by 25 percent this month, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline. Sun Hung Kai Properties Ltd., the city’s biggest developer by market value, is down 17 percent in 2015.

The Hong Kong Monetary Authority said in a report Friday the risk of a "downward adjustment" in home prices is increasing amid volatility in global and domestic financial markets.

“It’s bad timing with an interest rate hike coming in the U.S. and slowing GDP in Hong Kong," Lau said. “All these things put together in a nut shell and I don’t see any strength in the market.”

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