Recovery may put strain on developers' credit ratings

PUBLISHED : Friday, 19 September, 2003, 12:00am
UPDATED : Friday, 19 September, 2003, 12:00am

A rebounding property market could prompt developers to step up spending plans, hurting their ability to repay debt and adversely affecting their credit ratings, Moody's Investor Service warned yesterday.

Despite lower operating cash flows, Hong Kong developers had significantly reduced debt and contained costs in recent years, given uncertainties over the local economy and the real-estate market, said Clara Lau, vice-president of Moody's in Hong Kong.

But the period of belt-tightening could be coming to an end as developers consider new investments to take part in the market recovery.

'Ratings would experience downward pressure if higher capital expenditure is not counterbalanced by rises in operating income or cash flow from other sources, such as asset disposals or dividend reductions,' Ms Lau said.

Sun Hung Kai Properties plans to spend about HK$400 million upgrading two shopping arcades in Mongkok and Sha Tin. Hongkong Land will spend US$210 million converting the Landmark into a complex of office, retail and hotel space.

The ratings impact of the new round of capital plans would depend on the companies' financing structures, Moody's said.

Ms Lau said some companies with substantial exposure to the office market could see their credit ratings pressured due to the depressed outlook for the sector.

'Moody's expects overall office rentals in Hong Kong to remain under pressure in 2004, given the supply overhang resulting from completion of Two International Finance Centre,' she said.