Wobble in Hong Kong’s property exposes people with weak foundations

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Hong Kong’s real estate market was once considered an Asian financial outlier. It was defined by rare lands, powerful legal protection measures, and disciplined local developers. Even as mainland China’s property groups were engulfed in a chaotic storm of default and debt, investors’ trust in Hong Kong developers was retained thanks to the city’s pricing dynamics and the belief that the balance sheet was fundamentally more resilient.

But that recognition lies under new scrutiny. Hong Kong real estate transactions fell 28% in the first quarter compared to the previous year, but average home prices have fallen nearly 30% from their peak in 2021. Mainland capital management and weak domestic sentiment have historically kept the sale of luxury units, a margin driver of city developers.

Stocks in the sector have been under pressure in recent months, especially after New World Development, one of Hong Kong’s largest real estate groups, postponed interest payments on some of its permanent notes earlier this month. The fear of potential defaults on US dollar-controlled bonds has been heavier in the market until equipment owners confirmed their last minute payments this week.

The new world certainly lies under economic tensions. Best known for its groundbreaking assets such as the Victoria Dockside, it has become a symbol of the city’s luxury retail and lifestyle ambitions. However, it is Hong Kong’s most beneficial developer, as its debt is over HK$210 billion. New World’s net debt is more than 28 times the EBITDA, a borrowing-to-profit ratio that shows serious distress. That outlook remains clouded by its former heavy reliance on buyer bases on the mainland that have since retreated.

However, it would be wrong to assume that the entire sector is equally burdening these troubles. Economic pressures in the New World are serious, but are primarily the result of corporate-specific decisions. Its high debt comes from growth and strategies to chase famous projects.

In contrast, peers like CK Asset and Sun Hung Kai Properties maintain healthier finances. The latter net debt is only 3.5 times the EBITDA thanks to relatively stable rental income and a conservative capital structure. CK assets, which fall below 5% of total net debt capital, are diversified into infrastructure, with over three-quarters of revenue coming from repeated revenues.

These differences are now reflected in the market. Certainly there is reason to consider Hong Kong’s real estate sector with concern. But as the sector undergoes long overdue stress testing, it’s the disparity between discipline and excessive developers that attracts the most attention.

june.yoon@ft.com

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