Workers at a property under development by Hong Kong-based Sun Hung Kai Properties Ltd in Beijing. [Photo / China Daily]

Measures to tighten realty market put squeeze on local developers

HONG KONG - Hong Kong developers are poised to snap up land on the Chinese mainland at a time when the fiances of their mainland rivals are being sapped by government property curbs.

Builders including Sun Hung Kai Properties Ltd and Cheung Kong (Holdings) Ltd took in HK$66 billion ($8.47 billion) from new-apartment sales in the six months ended June, a first-half record, according to Centaline Property Agency Ltd. Chinese developers face a shortage of credit and higher interest rates, prompting Standard & Poor's to cut its outlook on the sector.

"Hong Kong developers should have an advantage in acquiring land while their Chinese counterparts are less aggressive," said Jack Ye, a Shanghai-based director of investment at property broker Cushman & Wakefield Inc. "Chinese developers have turned cautious on land purchases as the government measures tightened their liquidity."

On July 29, Swire Pacific Ltd sold a mall in Hong Kong for $2.4 billion, yielding funds that Core-Pacific Yamaichi International Ltd analysts said will be deployed on the Chinese mainland. Hang Lung Properties Ltd said on the same day it has built up Chinese currency holdings of 20 billion yuan ($3.1 billion) for its projects in the country. Cheung Kong, controlled by Hong Kong's richest man Li Ka-shing, is scheduled to report interim earnings on Thursday, with analysts expecting a nearly threefold increase in net profit, helped by increased sales in Hong Kong.

Hong Kong's developers are betting there's more upside in other Chinese cities as curbs at home stem a 70 percent surge in housing prices since the start of 2009. Average home prices rose 0.2 percent on the Chinese mainland in July from the previous month, with prices increasing in 66 out of the 100 cities surveyed by SouFun Holding Ltd.

Builders in Hong Kong are among the world's most cash-rich after a two-and-a-half-year property boom in the city of 7.1 million people. The top 51 developers in the city have an average debt-to-common-equity ratio of 47 percent, compared with the average 126 percent of their counterparts on the mainland, according to data compiled by Bloomberg.

Even the most indebted Hong Kong developer in the Hang Seng Property Index, Henderson Land Development Co, is better off than the least indebted among the mainland's 10 biggest developers, Soho China Ltd. Henderson Land's ratio at the end of 2010 was 34 percent, while Soho's was 55 percent, Bloomberg data shows.

"Hong Kong developers have enough cash for countercyclical investments in other Chinese cities," said Dundas Deng, a Hong Kong-based analyst at Guotai Junan Ltd. "Hong Kong is facing a serious property bubble caused by its historically low interest rates. Hong Kong developers will need the mainland market to boost earnings, especially when interest rates rise at home."

Home prices in Hong Kong may drop 30 percent by 2013, Barclays Capital said in an April 4 report, as borrowing costs rise.

Concern that the Chinese economy may be overheating led the People's Bank of China to raise interest rates five times and the reserve-requirement ratio 12 times since the start of 2010 to tame inflation. Some cities have imposed property taxes, downpayments have been increased, and more second- and third-tier cities have announced measures to dampen housing prices.

The Chinese mainland was unable to sell 353 parcels of land, including 163 pieces for residential development, at auction in the first seven months of this year, 242 percent more than the same period a year ago, the Beijing Times reported on Wednesday, citing Beijing Homelink Real Estate Co.

The outlook for mainland developers was cut to "negative" from "stable" by Standard & Poor's on June 15. The ratings company said tighter credit and further government curbs may lead to rating downgrades in the next year.

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