Reading the latest round of reports, predictions and surveys on property in China and Hong Kong does not leave one feeling very hopeful about investment prospects in what were, until recently top dogs of the Asian and global property world.
The government's measures started off slowly, but ended up attacking the market from all sides. Increasing borrowing costs and reducing lending hit consumers and developers, with the latter then being hit again because the higher cost of borrowing, reduced availability of loans and additional taxes in many cities also took a bite out of demand.
A report by Credit Suisse, forecasting a 25% drop in office rents next year and flat-growth in 2013 sent developer stocks tumbling. Adding insult to injury the government poured water on claims that the cooling measures would be reversed anytime soon, according to media reports, People’s Bank of China adviser Xia Bin said that the overall direction of the government's regulation would be staying the same for the foreseeable future.
"The PBOC’s efforts at supplying credit to some hard-hit sectors of the economy shouldn’t be seen as a sign that authorities are about to reverse controls designed to curb price rises on the property market," he said.
As was witnessed in India, the rapid rise in borrowing costs has exposed many developers as potentially overstretched, especially as they coincide with falling profits. According to the Credit Suisse report Hong Kong’s dozen or so biggest property developers need to reduce their invested capital collectively by 584 billion Hong Kong dollars ($75 billion).
“Hong Kong property companies are way too big and have tied up way too much funding on assets that are not producing sufficient returns,” Credit Suisse analysts said in the note.
In fact, Cheung Kong Holdings Ltd. was one of the few major real-estate groups Credit Suisse didn't flag as heavily extended.
However, Credit Suisse does not see a major correction in the future of Hong Kong's residential sector, like the "deflationary spiral" forecast by Barclays Capital last month that would knock 25-30 percent off residential prices over the next two years. Instead Credit Suisse forecasts a consolidation phase, with residential prices falling 10% next year.
Residential prices across the city have been under pressure since the second half, with prices for the bulk of the market, excluding luxury units, easing 3% to 4% since June, according to Citigroup data.
- Monday 09 January 2012