Hong Kong developers likely to meet 2016 sales targets despite further 10-15 per cent fall in home prices, says S&P
Robust underlying demand and low unemployment should prevent Hong Kong’s property market from falling to the lows of 1997-2003 or 2008, says US ratings agency
Hong Kong’s property sector faces a bumpier ride this year with average home prices expected to fall 10 to 15 per cent from 2015 levels, but that’s still not enough to trigger a downgrade on developers, says Standard & Poor’s.
The US rating agency’s forecast comes after home prices have already fallen a sharp 9.5 per cent from their peak in September last year.
Esther Liu, credit analyst at Standard & Poor’s, believes transaction volume will be flat to 5 per cent higher.
“We believe the secondary market will find equilibrium in price and volume, rather than a downward spiral,” she said. “We do not expect prices to decline [as much] as they did in 1997-2003, or in 2008, given robust underlying demand and low unemployment.”
She expressed confidence in the ability of most Hong Kong developers to meet their sales targets in 2016.
“Our ratings on most Hong Kong property developers in general can withstand a 30 per cent drop in sales before reaching the downgrade trigger,” said Liu, speaking during a teleconference on Monday to announce details of the report, titled “No easy street for Hong Kong developers in 2016.”
She attributed the resilience of local developers to the fact that revenue from recurring income would temper earnings volatility in the residential property market. Their generally good financial flexibility, prudent financial management, and disciplined investment approach would provide a buffer to the ratings if the downturn becomes more severe.
Liu said ratings on all developers would be affected only if a severe price drop of more than 50 per cent occurs.
“In this scenario, these developers’ ebita ( earnings before interest, taxes and amortisation) would
fall an average of 20 per cent to 35 per cent and their debt to ebita or interest coverage ratio would likely beach our downgrade triggers,” she said.
Standard & Poor’s did not expect the Hong Kong government to remove property cooling measures unless home prices suffer a further correction of 40 to 50 per cent, Liu said.
S&P maintains its stable outlook on rated Hong Kong developers.
For the next 12 to 24 months, Liu said local developers are likely to prudently manage their financial performance and maintain adequate financial buffers.
Their refinancing risk continues to be low, thanks to good relationships with, and access to, banks and financial markets. Developers with a strong brand name, a varied product mix with market segment diversity, and recurring income will be better prepared to face a tougher market.