Mainland Chinese and Hong Kong property stocks traded mostly lower Wednesday after fresh doubts surfaced that real-estate prices in the region will be able to escape the global maelstrom in 2012.
The stocks’ slide coincided with a new report by Credit Suisse which forecast office rents in Hong Kong to drop by 25% next year and then stay flat in 2013.
The report, which summed up the view as “bleak but not doomed” in a subsection, was distributed to the media after the close of trading on Tuesday.
Meanwhile, media reports cited People’s Bank of China adviser Xia Bin as saying Wednesday that the overall direction of property-market regulations will remain in place
Xia, speaking at a forum in Beijing, said the PBOC’s efforts at supplying credit to some hard-hit sectors of the economy shouldn’t be seen as a sign that authorities are about to reverse controls designed to curb price rises on the property market.
On the bright side for local commercial-property developers, Credit Suisse said the supply-to-demand outlook was supportive, as relatively few new releases of office property were due out in the coming year.
The shortfall, it said, should help guard against a steeper decline in rental rates for top-rated office property.
Still, Credit Suisse said rising funding costs were a concern. Hong Kong’s dozen or so biggest property developers would need to reduce their invested capital collectively by 584 billion Hong Kong dollars ($75 billion), it said.
“Hong Kong property companies are way too big and have tied up way too much funding on assets that are not producing sufficient returns,” Credit Suisse analysts said in the note.
Cheung Kong Holdings Ltd. was a noteworthy exception, being one of the few major real-estate groups which wasn’t flagged as heavily extended.
Credit Suisse said Hong Kong property was entering a “consolidation phase” rather than a major correction, with prices set to drop by 10% next year.
As such, the outlook was better than Barclays Capital’s Nov. 4 report that Hong Kong property prices were likely to fall in a deflationary spiral that would knock residential prices 25% to 30% lower through between 2012 and 2013.
Residential prices across the city have been under pressure since the second half, with prices for the bulk of the market, excluding luxury units, easing 3% to 4% since June, according to Citigroup data.
Profits feel the pinch
Credit Suisse said its recent talks with listed mainland Chinese developers added to concern that profits margins are dropping sharply as real-estate price cool.
It said an average price decline of 10% would translate into a 28% fall in developer’s profits, and reaffirmed its negative view on the sector.
Meanwhile, Standard Chartered, in research released Tuesday, said its survey of residential developers focused on China’s lesser-known cities found many were struggling with rising inventories and disappointing sales.
However, the situation was far from dire, it said, adding there were no hints of any serious deterioration in financing conditions in the survey, which was conducted during October and November.
There was also little evidence of widespread “fire sale” price discounts on the part of developers, with most appearing fairly confident apartments would be snapped up if prices were to drop 20% from current levels, according to Standard Chartered.
“Developers are now feeling the pinch, but relatively few are on the verge of collapse, it seems,” Standard Chartered analysts said in the note.
In Wednesday afternoon market action, Hang Lung Properties Ltd. traded down 4.1%, while Cheung Kong Holdings lost 3%, and Henderson Land Development Co.fell 3.4%
Among mainland Chinese developers, shares of Agile Property Holdings gave up 3.3%, while China Resources Land Ltd. dropped 1.9%, and Greentown China Holdings Ltd. plunged 7%
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