Property firms take hit from rate rise

Shares of Hong Kong developers fell yesterday after three major banks raised mortgage rates by 25 basis points amid mounting risk in the property market.

Henderson Land Development and Hang Lung Properties dropped 3.3 and 2 per cent, respectively.

The Hang Seng properties sub-index, which monitors nine of the biggest real-estate firms listed in the city, fell 1.4 per cent.

In contrast, the benchmark Hang Seng Index recovered from early losses to close 0.28 per cent higher, supported by buying in heavyweight HSBC and mainland lenders.

Joining HSBC and Standard Chartered Bank, Hang Seng Bank announced yesterday it would lift mortgage interest rates by 25 basis points with immediate effect.

William Fong, a portfolio manager at Baring Asset Management, said he would not consider increasing holdings of property stocks after the rate rise and was looking at opportunities in other sectors. Yet he will also not sell his current holdings.

"The rate increase is well anticipated and I don't see too much downside room ahead," Fong said.

Stephen Sheung, the head of investment strategy at SHK Private, the high-net-worth client division of Sun Hung Kai Financial, said a "sector rotation" had started.

"Investors are moving out of the property sector and play cyclicals, such as Chinese financials and industrial names," Sheung said.

"This is the right thing to do now because China's cyclical recovery story would last until the third quarter and earnings growth will continue going up during this period."

He said yesterday's slump was an overreaction because people were worried mortgage rates might rise sharply in the near term.

"This is the start of a mortgage-rate-rising cycle, yet the pace would be extremely slow. Don't expect banks to aggressively raise rates till the end of the year as the domestic mortgage market is competitive and there is little upward pressure on US interest rates," Sheung said.

The US Federal Reserve would meet next week, which could give more hints on the central bank's views about whether to cease the monthly asset purchase plan sooner than expected, he said.