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Hong Kong Property Stock Gloom Seen Deepening in Options Market

Boom & Bust: Hong Kong's Real Estate Market

As Hong Kong property prices slump with real estate stocks, investors are looking to the options market for protection.

Traders paid the most in four years in January to hedge against losses on Sun Hung Kai Properties Ltd. versus the cost of bullish bets, according to data compiled by Bloomberg. A similar pattern emerged in options on Wharf Holdings Ltd. A measure of the city’s property stocks is down 33 percent in the past year, with losses accelerating in January as the Hong Kong dollar weakened and real-estate sales fell to the lowest in at least 25 years.

“Pressure on share prices in the sector will persist," said Alfred Lau, analyst at Bocom International Holdings Co. “Investors’ concern is deepening on faster-than-expected Hong Kong capital outflow."

Hong Kong’s home prices have dropped about 9.5 percent from their record high in September, according to an index compiled by realtor Centaline Property Agency Ltd. Investors are pulling money out of the city amid concern that it will be squeezed between China’s economic slowdown and rising interest rates in the U.S., which drive up borrowing costs in Hong Kong through the currency peg.

Bocom International sees property values sinking as much as 30 percent this year, while UBS AG says that may happen by the end of 2017. Short-term interest rates in Hong Kong have jumped since the end of last year, threatening to hurt housing affordability. House costs more than doubled from the end of 2008, prompting the government to impose measures to curb prices that had become out of reach for many local residents.

Implied volatility for three-month contracts with an exercise price 10 percent below Sun Hung Kai shares, was 6.9 points more than on similar bullish contracts on Jan. 20, the biggest premium since October 2011. While the gap, used to gauge the cost of options, has dropped since then to 2.8 on Tuesday, it’s still more than twice its one-year average. Similar contracts for Wharf show the skew reached a 3 1/2- year high on Jan. 21, while those for Henderson Land Development Co. traded at levels last seen in October 2011. Options on some of the smaller companies are not listed on the exchange or are thinly traded.

“Investors want to buy some put options in order to hedge the downside risk as they are expecting property stock prices to fall," said Sam Chi Yung, a strategist at Delta Asia Securities Ltd., noting the purchases are more likely for hedging than for speculation. A sliding currency “may reflect investors are trying to sell out of the Hong Kong dollar or Hong Kong assets."

To maintain its peg with the U.S. dollar, Hong Kong must match interest-rate hikes by the Federal Reserve. The Hong Kong Interbank Offered Rate for three-month loans, which determines the cost of more than 80 percent of new mortgages, climbed 28 basis points this year. The Hong Kong dollar fell to an eight-year low last month, illustrating the demand to move money out of the city. The weakening yuan is also adding to pressure by eroding the purchasing power of mainland home buyers, according to some analysts.

Amid the gloom, rock-bottom valuations on most property shares has spurred some brokerages to recommend buying the stocks. Hong Kong’s biggest developers and landlords trade at average 8.2 times reported earnings, compared with 16 times globally. BNP Paribas SA said in a note last month current valuations are cheap and are a good buying opportunity. Current share prices have factored in a house-price drop of more than 20 percent for large developers, according to Jeff Yau, an analyst at DBS Vickers Hong Kong Ltd., who says he still doesn’t see any catalysts for the shares to rebound.

A Wharf spokeswoman said the underlying business is sound, declining to comment specifically on options. Henderson and Sun Hung Kai didn’t respond to questions on their contracts.

Sun Hung Kai shares dropped 2.8 percent at the close on Wednesday, while Henderson slid 4.1 percent and Wharf retreated 2.8 percent. Cheung Kong Property Holdings Ltd., which spun off in June, retreated 3 percent. Centaline estimates that transactions reached 3,000 units last month, the lowest since it started tracking data in January 1991. The previous low was 3,786 units in November 2008, according to a Jan. 31 release.

For Pauline Dan, the head of Greater China equities at Pictet Asset Management Ltd., the worst for home-owners might be still to come. While shares have priced in negative news, “the physical market definitely would have more downside because the adjustment is just beginning," she says.

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