Rivalry fuels fears over price cuts

Fierce competition in Hong Kong's depressed housing market has forced developers to offer steeper discounts, deepening fears of an even sharper price correction and continuing to spook stock punters.

Among developer stocks, Cheung Kong, which has diversified into telecommunications, energy and retailing around the world through its associate, Hutchison Whampoa, was singled out as the most resilient in the face of a downturn.

To drum up buying interest, Couture Homes and ITC Properties announced on Tuesday that they would pay half the buyer's stamp duty of non-permanent residents and corporations as they released the remaining 15 units at their luxury project, Yoo Residence, in Causeway Bay.

The offer came two days after Sun Hung Kai Properties announced the relaunch of its luxury housing project Cullinan in West Kowloon at nearly 20 per cent lower than prevailing transaction prices in the secondary market in the area. Units at the two projects, which each costs more than HK$12 million, will go on sale today.

"It marks the beginning of the discounted sale of unsold units," said Susanna Leung Sze-wai, a senior research analyst at brokerage CLSA. "Home prices will come under growing pressure of downward adjustment."

If SHKP failed to achieve an impressive sales outcome from the Cullinan, Leung said it could have an immediate negative impact on property stocks.

Investors would go underweight in the sector amid worries about developers' profit margins if they offered sharper cuts in prices for their projects.

"At present, developers are testing the market and finding the floor prices in the residential market," Leung said.

She would not rule out the possibility that a price war could break out if more developers followed in the footsteps of SHKP's price cut in an effort to offload their unsold units.

Leung forecast home prices would drop 15 per cent by the end of next year, with developers' profit margins tumbling to 20 per cent, compared with the 35 per cent they enjoyed during boom times.

In contrast to declines in major property stocks such as SHKP and Henderson Land Development over the past 12 months, shares in Cheung Kong have risen 7 per cent during the period to HK$123.90 yesterday, outperforming the Hang Seng Index's 1.66 per cent gain.

Since October last year, SHKP has lost 6.5 per cent to HK$103.90 and Henderson has shed 9.5 per cent to HK$47.

Joyce Kwock, a property analyst at Credit Suisse, wrote in her latest report that the net asset value for major Hong Kong developers would fall by 5.8 to 10 per cent should property prices drop 20 per cent this year.

Under such a scenario, Kwock said, the discount to their net asset value would be 28 to 48 per cent.

She said the shares of property developers, especially Cheung Kong, Henderson and SHKP, had already factored in a price fall.

"We believe developers with strong execution ability after launching their projects while maintaining a decent profit margin will outperform," she said.

She said the soon-to-be-launched Austin project, above the Austin MTR station in Tsim Sha Tsui and near the Cullinan, and Hang Lung Properties' Long Beach in Tai Kok Tsui could join the price-cut trend.

Li Kwok-suen, a fund manager at Phillip Capital Management, expressed concern about the negative impact brought about by changes in the external environment, such as the United States Federal Reserve's plans to scale back bond purchases, which could herald the beginning of an upward trend in interest rates.

"As property stocks are sensitive to movements in interest rates, a rise [in interest rates] will immediately increase developers' borrowing costs," Li said.

Andrew Lawrence, the managing director of equities research for real estate at Malaysian-based investment bank CIMB Securities, who forecast home prices would fall up to 15 per cent next year and a further 15 to 20 per cent in 2015, said he preferred companies with a faster asset-churn model, shorter land bank duration and a smaller exposure to the Hong Kong property market.

"Given our outlook for the market, our preference is for more defensive plays within the property sector, of which Cheung Kong is one," Lawrence said.