Hong Kong homebuilders to face tougher limits on bank borrowing

Hong Kong’s property developers will face tougher restrictions on the amount of money they can borrow from banks under new measures to be introduced next month in a bid to protect lenders from risk.

From June 1, all banks will be required to lower their caps on the amount they lend to developers for construction financing, according to a circular issued by the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, on Friday.

The HKMA says it is concerned about the risk the city’s banks are exposing themselves to by lending large amounts to homebuilders, some of whom have been funding their land purchases entirely through borrowing.

Under the new measures, the maximum limit on bank loans used by the developer to buy a plot of land will be cut to 40 per cent of the value of the site, down from 50 per cent now.

The cap on loans for the construction costs will come down to 80 per cent from the current level of 100 per cent. And the overall cap on bank financing for the whole project will be reduced to 50 per cent of the expected value of the completed properties, from the 60 per cent at the moment.

Analysts said the move will increase homebuilders’ overall development costs and particularly hit those who rely heavily on financing for their projects.

The new, stricter regulations are designed to “enhance risk management measures on banks,” according to Arthur Yuen, deputy chief executive of the HKMA.

The HKMA hopes that by cutting the amount of financing available to the homebuilder it will discourage the developers from offering generous mortgages to buyers – something seen by most observers as hindering efforts to deflate Hong Kong’s sizzling property market.