Hong Kong Property:HKMA announces new curbs on financing to developers

Expect little impact to Hong Kong developers on strong financial position

    In response to surging land prices in recent months with some developershaving been able to borrow the full land acquisition cost through differentfinancial institutions, the Hong Kong Monetary Authority (HKMA) announcednew curbs on financing to developers with an aim to keep banks’ credit riskexposure in check. In our view, while the new measures will adversely impactthe IRR of development projects, the impact should be mild for HK developerson the back of their strong financial positions. On the other hand, we think theimpact on financial returns will be relatively more significant to Mainlanddevelopers that rely on bank loans as the primary means of financing. Yet wedo not expect it will change their appetite to participate in the HK propertymarket, as the profitability gap between HK and their home market is stillsizeable.

    HKMA announced 3tightening measures on financing to developers

    After the market close on May 12, the HKMA announced 3tighteningmeasures on financing to developers to be implemented on June 1, 2017: 1)Lowering the maximum LTV on land acquisition (from 50% to 40%),construction loan (from 100% to 80%) and overall cap (i.e. total loanscompared with the expected market value upon completion) from 60% to 50%;

    2) Raising banks’ risk weightings for credit exposures to property developers toreflect the level of mortgage exposure undertaken by developers (manydevelopers have been offering high LTV mortgage plans to buyers). Theapplicable risk weights will be dependent on the extent of the respectivemortgage exposure of the developers and the new capital requirement will beimplemented in 2phases; 3) HKMA will conduct thematic examination onbanks in 2H17to ensure that they are following a prudent approach inextending credit to property developers.

    Factoring mortgage credit risk from property companies

    We believe the HKMA is seeing higher risks from the banks’ exposure to theproperty developers, as(1) some of them have significantly geared up topurchase land bank while(2) some of the fully owned finance companies’subsidiaries have bypassed the prudential mortgage measures throughoffering higher LTV mortgages to customers. In our view, these new measuresare sensible as they will lower the caps on banks’ financing to the site valueand construction cost, while also placing high risk weights to developers thatoffer high LTV mortgage to the buyers. Given the likely strong internal ratingsenjoyed by many property companies in Hong Kong, we believe their lowborrowing rates have not have fully captured the additional risks they havetaken on in recent years. While we believe the impact should have limitedimpact on loan growth and capital deduction, these measures should furthersafeguard the system as well as pricing additional mortgage credit risks thatweren’t captured before.