Published December 11, 2008

HK developers in denial as prices slide

(HONG KONG) Hong Kong's big developers have been in denial mode for the last week, countering grim forecasts of more property price slides with upbeat messages.

But faced with recession, looming job cuts and rising mortgage rates, few in the city believe them - although some analysts think their share prices reflect too much pessimism.

In property agency shop windows across the city, slashes of red marker pen and newly scribbled prices suggest apartments have already dropped 20 per cent in value in the last month.

Growing public expectations of a repeat of a 2003 slump, when the Sars respiratory disease ravaged Hong Kong's economy, prompted Sun Hung Kai Properties to predict last week that prices would rebound 5 per cent in 2009.

And Henderson Land chairman Lee Shau-kee, nicknamed Hong Kong's Warren Buffett for his savvy investing, ventured that the worst for the city's property market was past. He then added that the worst of the global economic slowdown was yet to come.

Many disagree with that property outlook, including Stephen Riady, president of Indonesia's Lippo Group, which invests in property across Asia, including in Hong Kong and China.

'I doubt that,' Mr Riady said of the upbeat predictions. 'I think Hong Kong will probably go down much more. It's a very volatile market. It'll go down more than Singapore.'

A poll of analysts last month showed Hong Kong apartment prices were expected to drop 20 per cent by the end of next year and Singapore prices would fall 21 per cent.

Brokers GFI Colliers say indicative property derivative levels suggest investors are betting Hong Kong prices will reach a bottom in December 2009, falling at least 25 per cent from now.

Chris van Beek, vice- president at GFI Colliers, said landlords, with anywhere between five or six apartments to portfolios worth US$65 million, were keen to switch to cash.

But they were dropping prices because buyers are scarce, partly because banks are demanding 30- 40 per cent downpayments rather than 10 per cent before the financial crisis.

'Some are offloading at 30 per cent discounts, but struggling to sell,' Mr van Beek said. 'Many buyers think they might as well wait another four or five months for prices to come down more.' Hong Kong property transactions fell to a 17-year low in November, down 87 per cent in value from a year earlier.

The territory is in recession, with exports hit by weakening global demand and consumers jolted by falling asset prices.

Although Sun Hung Kai reported strong interest at one of its projects last week - where buyers were given discounts of up to 13 per cent - the firm has cut its target for apartment sales this financial year by a fifth.

Mortgage rate hikes by HSBC and Bank of China (Hong Kong) last week did not help, with the banks keen to address concerns over higher lending risks.

However, analysts do not expect a repeat of the negative equity on mortgages seen in the early 2000s, because property prices have almost doubled since the beginning of 2004.

CLSA analyst Nicole Wong expects residential prices to fall 15 per cent in the next year, but believes investors have been too bearish on Hong Kong property stocks - pricing in a Sars-like scenario when that was unlikely.

She pinpointed Sun Hung Kai, Henderson Land and Sino Land as good value. The stocks are trading at discounts of 48-62 per cent to net asset value. -- Reuters