Hong Kong developers’ shares plunge after government’s surprise cooling measure

Hong Kong developers’ share prices plunged on Monday after the government announced the highest stamp duty yet on property transactions in the city.

Analysts said the new tightening came as a big surprise and they expect home prices to face severe cooling pressure.

Cheung Kong Property Holdings slumped 8.8 per cent, Sun Hung Kai Properties fell 9.8 per cent, New World Development dropped 9.3 per cent while Henderson Land declined by 5.9 per cent at the close of trading on Monday. The city’s benchmark Hang Seng Index was up 0.7 per cent.

The Hong Kong government raised the stamp duty on all residential transactions to 15 per cent, from the previous range of 1.5 to 8.5 per cent, effective from November 5. First-time home buyers with permanent Hong Kong identity cards are excluded.

Counting previous curbs, the total transaction cost for non-locals buying a property now equals up to 30 per cent of the total consideration.

The increase in stamp duty to 15 per cent was “unexpected”, JP Morgan analysts wrote in a note. “This is likely to hurt sentiment significantly, causing a sharp drop in transaction volume for both the primary and secondary markets,” they said.

Credit Suisse analysts expect a 25 per cent drop in residential demand with mass-market properties more badly hit.

The new measure also comes at a time when presale home supply and the risk of an interest rate increase are rising, Credit Suisse said, forecasting a 22 per cent price correction by the end of 2018.

Mizuho Securities on Monday downgraded property giants Sun Hung Kai Properties and Henderson Land to “neutral” from “buy”.

“We believe transaction volumes will drop by 20 to 40 per cent in the coming quarters,” said Alan Jin, property analyst at Mizuho Securities, adding that the investment bank now estimates Hong Kong home prices to drop by 10 per cent in both 2017 and 2018.

After a short-lived correction, Hong Kong’s residential market has seen a marked pick-up in recent months. Home prices cumulatively rose 8.9 per cent over the past six months, according to government data, with September 2016 prices just 3.5 per cent below the peak in September last year.

Increasing investor demand has led the market rebound, especially in so-called tiny flats with lower lump sums needed for purchase. Flats as small as 163-square foot on Hong Kong Island currently have an asking price of nearly HK$4 million.

The overheated market has prompted the government to crack down on speculation ahead of a likely US rate rise in December.

But some analysts are not so pessimistic given that demand is still strong both locally and from mainland China.

“Capital, in particular from mainland China, would rather flow into Hong Kong as the markets in other countries could be more volatile at the moment,” said David Ng, head of China and Hong Kong research at Macquarie.

He added that the large number of new immigrants from the mainland to Hong Kong who have obtained permanent resident status will also add to the purchasing power.

Macquarie expects home prices to drop 6 per cent over the next two months until year’s end but continues to believe prices will increase 5 per cent by the end of 2017.

Yet share prices of developers will be under pressure as they are likely to offer rebates or cut prices to attract buyers, Ng said.