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Kenneth Ko

Analysts do not expect a credit-rating and outlook downgrading to affect the cost of borrowing for major property companies.

Goldman Sachs believed the Standard & Poor's credit downgrades should raise Hong Kong property companies' risk premium by five to eight basis points. But the downgrades were likely to have a minimal impact on the companies' funding ability. Most of the property companies managed their balance sheets 'very conservatively' and did not borrow excessively.

On Tuesday, S&P lowered ratings on Hongkong Land, Swire Pacific and Hysan Development and downgraded outlooks for Sun Hung Kai Properties (SHKP), Wharf (Holdings) and Kerry Properties to negative from stable. It also placed Cheung Kong (Holdings) on credit watch with negative implications.

Goldman Sachs said most of the companies relied on local banks rather than capital markets for funding.

'Local banks have liquidity power and are still able to offer reasonably generous spreads,' it said.

Credit-rating agencies generally took a three-year view when they reassigned ratings, it said.

Goldman Sachs believed the message from S&P was that there was no visible improvement for the market in the medium term and the sector was facing structural rather than cyclical issues.

Salomon Smith Barney analyst Robert Fong agreed with S&P that deflation and supply pressures were capping any potential residential capital appreciation.

However, he was a little confused.

'I find it odd that they would come out now and cite factors which have been around for the past three years as reasons for a credit-rating or outlook downgrade,' he said.

HSBC Securities analyst Derek Cheung expected the property companies which had been downgraded by S&P would not be affected due to their consistent low gearing and the existing competitive credit market.

He said banks were 'flooded with cash' and were competing for blue-chip borrowers such as Cheung Kong and SHKP.

'Borrowing costs for small-scale developers, which S&P's report did not cover, will be affected the most, since creditors are unwilling to lend to risky companies if they have a better choice.'

Mr Cheung said the property market was hindered in the short term by an oversupply. Long-term prospects would be affected by sales of subsidised housing and the overall economy.

'The primary residential market should be pressured if the Government releases too many subsidised flats for sale in the second half of the year, as developers are urgently preparing for extensive sales,' he said.

Vigers Hong Kong managing director Albert Chan Kar-chai expected mass residential prices to continue to fall due to wage cuts and deflation, but said luxury rents and prices could rise.

He said office rents had fallen but take-up had improved.

Vigers estimated mass flat prices fell year on year by 17.7 per cent in the first quarter, while luxury prices dropped 8.5 per cent. Grade A office rents in Central fell by almost 16 per cent and sale prices eased 4 per cent.



Scant impact expected from rating downgrade for developers