Hong Kong property

Hong Kong homebuilders to face tougher limits on bank borrowing

PUBLISHED : Friday, 12 May, 2017, 8:09pm
UPDATED : Friday, 12 May, 2017, 11:37pm

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.

The extension of construction financing to property developers may expose banks to a substantially higher level of credit and moral hazard risk
HKMA circular

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.

However, Yuen said the new measures are “not intended to cool down the property market.”

The authority collected data on the mortgages offered by 13 developers and found some were offering home loans of between 90 per cent and 120 per cent of the value of the properties.

These developers had offered a total HK$27.6 billion worth of mortgage loans as of the end of last year, up 189 per cent from HK$10.7 billion at the end of 2015.

“HKMA observes that it is now common for property developers to offer mortgage financing with high loan-to-value ratios to buyers to promote sales of their property projects,” the authority said in the circular.

These high loan-to-value ratios usually exceed the 70 per cent cap on banks’ mortgage loans because the developers are not regulated by the HKMA and are free to offer these loans.

HKMA considers that these loans exceed the “prudential requirements” for banks’ mortgage loans.

Moreover, the lending practices of some of the property developers are inconsistent with the prudent lending practices of banks, the HKMA circular said.

“In some cases, we understand that borrowers are not required to go through an assessment of their repayment ability,” it said.

While the amounts being loaned by developers are still relatively low, the HKMA warned that “it is growing at an increasingly rapid pace.” The authority said banks need to review their risk exposure to housing developers.

In addition to limiting the amount loaned, the HKMA will require banks to add 50 per cent more capital weighting on developers who offer total mortgage loans at an amount equal to more than five per cent of their book value.

Those offering mortgages valued at equal to or more than 10 per cent of their book value or if they refuse to provide the relevant information, banks would need to double the capital amount to back up the loans they are offering to these developers. This new requirement will start from August 1.

Yuen said some developers had reached the 5 per cent threshold while none were currently at the 10 per cent threshold.

The new HKMA restrictions come after some property developers involved in recent land acquisitions borrowed heavily to finance their projects.

“In a few cases, the amount of the land acquisition cost was financed entirely through borrowing from different authorised institutions [banks]. The extension of construction financing to these property developers may expose banks to a substantially higher level of credit and moral hazard risk.”

Hong Kong developers such as Sun Hung Kai Properties (SHKP) and Cheung Kong Property Holdings are among those offering mortgages to homebuyers. Last year, SHKP announced a mortgage offer worth as much as 120 per cent of a home’s value at its project, Park Yoho Venezia, in Yuen Long.

Hong Kong’s home price index, which tracks prices in the secondary market, rose for a 12th consecutive month in March, advancing 2.2 per cent to a record 319.8, according to data compiled by the Rating and Valuation Department. On a 12-month basis, home prices rose 17.8 per cent.