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Interest rates and stamp duty put pressure on developers

Rising interest rates and penalty stamp duty rates aimed at cracking down on speculation could end last year's brisk growth in property sales and present Hong Kong developers with a challenging operating environment, say agents.

Property firms were able to deliver positive results last year and distribute higher dividends to reward shareholders on the back of the rise in home prices and strong sales. But that could change in 2011.

'Most developers generated a slightly better than expected performance in 2010,' said Lee Wee Liat, head of regional property at Samsung Securities (Asia).

Boosted by the rapid rise of home prices, Sun Hung Kai Properties (SHKP), the biggest developer in Hong Kong in terms of market capitalisation, announced record interim underlying profit of HK$10.41 billion for the six months to December. That was 60 per cent higher than the same period a year earlier.

To reward shareholders, SHKP recommended an interim dividend of 95 HK cents, up 12 per cent from the previous year.

Cheung Kong (Holdings) last week reported that core earnings - excluding property revaluation gains and profit contribution from associate Hutchison Whampoa - rose 26 per cent to HK$11.44 billion last year. It raised its dividend by 11.4 per cent, from 2009, to HK$2.45 per share.

Kerry Properties announced a 59 per cent increase in core earnings to HK$3.4 billion for the year to December, and shareholders will receive a 30 per cent higher final dividend of 52 HK cents.

Sino Land posted a 20 per cent growth in underlying interim profit to HK$2.43 billion for the six months to December. An interim dividend of 10 HK cents was recommended, the same as the previous year.

But developers are now wrestling with rising interest rates and facing a retreat by speculators from the market after the government imposed extra stamp duties on the quick turnover of properties and removed property as a qualifying asset under the investment immigration scheme.

'With shrinking investment demand, last year's high pricing strategy may not work this year as the market is now dominated by price-sensitive end-users,' said Lee. The total number of transactions, in both the primary and secondary markets, could tumble to 100,000 this year from 136,000 last year, he said.

Lee believed big players like Cheung Kong and SHKP could gain market share as they had greater flexibility. 'The two big developers have apartments with prices ranging from HK$6,000 per square foot to HK$20,000-plus per sq ft,' he said.

Developers focused on volume sales were likely to emerge as winners in 2011, since they could generate sufficient cash to weather the change in market sentiment, said Lee.

Latest sales data shows that the number of flat transactions in the secondary market has dropped to a seven-week low, with just 226 deals done from March 21 to 27. Declining buyer sentiment follows the announcement of home loan mortgage rates by the city's major banks, and the nuclear crisis in Japan which could add uncertainty to the global economic outlook.

Analysts said developers with strong cash flows would outperform rivals, and Paul Louie, an analyst at Nomura International, said last year's dividend payouts could indicate strong underlying free cash flow.

Given this year's challenging environment, he said, developers that raised dividends last year signalled confidence in their outlook for 2011.

Some analysts expect home-buying sentiment to weaken further should interest rates go up.

Major home lenders began raising interest rates on mortgages based on the Hong Kong Interbank Offered Rate (Hibor) last month.

Home loans priced off one-month Hibor had ranged from Hibor plus 0.8 per cent to Hibor plus 1 per cent, meaning effective mortgage rates of 1.03 per cent to 1.23 per cent. But since mid-March, lenders have upped premiums, to between Hibor plus 0.9 per cent and Hibor plus 1.3 per cent. That raises effective home loan rates to between 1.11 per cent and 1.51 per cent, based on Friday's one-month Hibor of 0.21 per cent.

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