Property firms up loan stakes in effort to kickstart sales

Electrical appliance shop owner John Ip hadn’t held out much hope of being able to trade in his small flat in Tuen Mun for a bigger place after the birth of his second child.

But then he heard about offers of mortgages of up to 123 per cent targeting people like him who wanted to upsize, and his interest was piqued.

“There is practically no way to move up because of stringent bank lending policies. So we were stuck with our old flat and no one was willing to give us financing to buy a bigger one even if we wanted to. But now, there’s hope for us to do this with the developers’ bigger loans,” Ip said.

“I was shocked and very much delighted at the same time.

“I never imagined owning a new flat as I don’t have enough money to pay for the 50 per cent deposit,” he said. He is yet to decide whether to take the offer.

Developers anxious to unload properties in the face of a slowing market have targeted people like Ip wishing to upgrade with aggressive mortgage plans that have triggered warnings from authorities about the high levels of risk.

Sun Hung Kai Properties (SHKP) was the first out of the blocks with a surprise offer last week of loans of up to 120 per cent without the need to submit proof of income, to woo buyers for its new Park Yoho Venezia project in Yuen Long. The deal applies to buyers who already own an apartment with a value of no less than 70 per cent of the purchase price of the new flats.

It was followed a few days later by CK Property, which offered would-be buyers of three-bedroom flats at its Yuccie Square project, also in Yuen Long, three-year loans of 123 per cent, provided they have an existing property worth 70 per cent of the new one to put up as collateral.

Buyers would be required to pay only the interest in the first year, but would begin repaying interest and principal from the second.

The deals are the latest tactic by developers in the face of dwindling sales and growing uncertainty over the market outlook. Market watchers widely expect home prices to head down, with some forecasting flat values to plunge by as much as 30 per cent by 2017.

Among other measures developers have taken are deferring completion dates of properties, interest payment holidays for buyers and subsidies to offset rising stamp duties.

Industry experts have also noted that major developers have slowed down land acquisition to build up war chests, anticipating that land values will tumble later.

But it’s the aggressive mortgage offers that have drawn the attention of the authorities, concerned over the possibility of a surge in indebtedness if buyers overstretch themselves.

The problem is, however, that the loans are being offered through developers’ own finance arms, which are outside the reach of the banking regulator.

“While property developers are outside our supervisory ambit, the fact that banks lend to property developers which, in turn, provide mortgages to homebuyers, indirectly increases the potential credit risk faced by banks,” said Arthur Yuen Kwok-hang, deputy chief executive of the Hong Kong Monetary Authority, which oversees banks and the financial system, in a posting on its website on Monday.

“The HKMA has been discussing with banks and studying the needs for introducing appropriate measures to strengthen the risk management of banks in respect of loans provided to property developers offering mortgage loans with high loan-to-value ratios,” according to the posting on InSight, the HKMA’s opinion blog.

Yuen urged potential home buyers to be very careful, since “the total interest expense for the entire term may be more than double that under a normal bank mortgage”.

Standard bank mortgages have a ceiling of 60 per cent for flats below HK$10 million in value and 50 per cent for those over HK$10 million.

Alfred Lau, an analyst at Bocom International, said the HKMA could issue stricter guidelines to banks when lending to finance companies owned by developers, but the effectiveness of any such measure is not clear since the criteria for extending loans to developers are based on an assessment of asset quality and balance sheets rather than on specific housing projects.

“If developers channel the funds to their wholly owned finance units to provide mortgages to home buyers, it is hard for banks to protect where the loan is going,” he said.

More importantly, many developers have built up strong financial positions and have no need to rely heavily on bank borrowing. The average gearing ratio among Hong Kong developers is 10 to 20 per cent, one of the lowest in Asia, he said.

As of last December, SHKP had bank andcash deposits of HK$24 billion while CK Property had HK$45.9 billion. Sino Land had net cash of HK$19 billion, even after deducting its total bank loans of HK$4.5 billion.

Joseph Tsang, managing director at property firm JLL, said the government’s four-year old cooling measures to curb buying demand have been undermined by the developers’ aggressive measures.

“An alarm bell is ringing louder in the property market. History tells us the previous property crash in 1997 was triggered by home owners who had stretched themselves beyond their limits,” he said.

“Highly geared home owners would find themselves in misery after the promotion period offered by developer is over, when interest rates are likely to be higher,” he said.

He warned that always volatile Hong Kong home prices could drop five to 10 per cent within a very short time should the economy deteriorate, meaning home owners who took the new deals could face the financial pressure of having to pay two mortgages if they could not sell their old flats once the full repayments on the new ones became due.

Owners who defaulted on payments would see their flats repossessed by developers, who would also have the right to sue for the difference between the resale price and the original sale price.

Tsang, however, said he did not think the trend for large mortgages would last long, as only a few developers had strong financial positions like SHKP.

But authorities may have other options if they want to curb the developers’ zeal, other analysts said.

The HKMA could liaise with the Commissioner of Police, which supervises finance companies, said Alvin Cheung Chi-wan, associate director at Prudential Brokerage.

Finance companies are governed by the Money Lender Ordinance, which is enforced by the Commissioner of Police.

Offering loans at interest rates exceeding 60 per cent per annum is an offence under the ordinance, he said.

He added, however, that the aggressive mortgage loans were unlikely to develop into a scenario like the sub-prime crisis in the US in 2007 and 2008, since the loans were extended by developers, not banks.

“The banking system in Hong Kong is very safe,” he said.

Another option would be for the Lands Department to hold back developers’ applications for pre-sale consent if they provide excessive lending, according to legislator Albert Ho Chun-yan.

But the developers said they were simply doing business.

CK Property’s executive director, Justin Chiu Kwok-hung, said the new mortgage loans came in response to growing demand from people wanting to upgrade.

“We are flush with cash, and are not worried about any HKMA intervention. The plan aims to help upgraders to buy homes within their means ,” he said.