Hong Kong’s property developers will struggle to service their bulging debts as interest rates soar

• Home builders are likely to have a hard time turning a profit as the interest payments on their debt mountains get bigger
• They are likely to be less aggressive bidding for land, and are coming under pressure to offload assets at lower prices

 

Raymond Cheng, managing director of CGS-CIMB Securities, has a sense of déja vu.

With Hong Kong’s housing market struggling, interest rates soaring and buying power faltering amid a slowing economy, the worrisome debt levels of property developers are in the spotlight.

The same was true in the years just before Cheng became an analyst in 2003.

“At that time, they could not make profits from home sales. Certain developers had tight financials, and most made little profit,” he said. “Generally, the whole cycle from 1997 to 2003 was a very difficult phase for Hong Kong developers.”

Home builders’ gearing ratios – a measure of how much of their operations are funded by debt – at that time were particularly high, at 60 to 70 per cent, Cheng said. Many of them had been aggressive in their land acquisitions, their appetite for risk fuelled by the many opportunities in the market in the 1990s.

During the deep correction between 1997 and 2003, when home prices nosedived some 60 per cent, they suddenly found themselves losing money on property sales.

The painful experience of those troubled times was enough to make many of them more financially prudent. Over the next few years, gearing levels fell to about 10 to 20 per cent as the developers reined in their expansion and allocated more of their money to investment properties.

But the low interest rate environment that’s dominated economics since the financial crash of 2008 has fuelled a resurgence of debt.