An old house is seen in front of new apartment buildings in Guangfuli neighbourhood, in Shanghai, China, April 18, 2016. REUTERS/Aly Song/File Photo Acquire Licensing Rights
HONG KONG, Nov 15 (Reuters Breakingviews) – Xi Jinping is stuck between debt-ridden developers and risk-shy bankers. The Chinese president’s latest attempt to boost housing through cheap loans is an enlarged version of a 2022 scheme. That didn’t work because lenders balked at increasing their exposure to over-leveraged real estate groups. Xi needs to articulate a broader plan to restore banks’ confidence in the troubled property sector.
The People’s Bank of China plans to provide at least 1 trillion yuan ($137 billion) of low-cost financing to shore up an ailing property market that at its peak accounted for more than 20% of the Chinese economy. Authorities will inject the fund in phases into urban renewal projects and public housing programs through state-directed policy banks, Bloomberg reported on Tuesday. They hope that, eventually, the money will trickle down to homebuyers.
Beijing’s problem is that the cash it doles out may not reach the intended targets because banks are reluctant to pass it on to property developers. The PBOC began providing interest-free loans to state banks in November last year after homebuyers staged nationwide protests and refused to make mortgage payments on unfinished homes. But banks have so far taken up less than 1% of the 200 billion yuan offered by the central bank, according to the Financial Times, due to high risks associated with distressed projects.
Authorities have stepped up efforts to put a floor under a market downturn in which nearly all major private-sector property firms have defaulted. The sour mood stemming from falling house prices is also weighing on consumer confidence and the broader economy.
Xi was grappling with a similar vicious cycle in 2013 when he first came into office. Things only started to change two years later when his administration intensely pushed a policy directive aimed at “destocking” the property sector, or helping developers reduce their inventory of unsold homes. Chinese banks heeded the strong signal coming from Beijing. They started to finance local governments to pay off displaced residents of shantytown redevelopments, who used the money to buy new homes.
That helped to shore up property prices and avert a crash. Paradoxically, that “destocking” led to a quick “restocking” as major developers quickly took on more debt, causing the real estate bubble that Beijing is fighting right now.
Still, simply throwing money at reluctant banks won’t help heal the current real estate wounds. Xi may need to take a page out of his own playbook and come up with an all-encompassing policy to deal with the problem once and for all.
CONTEXT NEWS
The People’s Bank of China plans to inject at least 1 trillion yuan ($137 billion) of low-cost financing into the real estate sector, as authorities step up efforts to shore up the struggling property market, Bloomberg reported on Nov. 15.
In November 2022, Beijing set up a similar scheme to provide 200 billion yuan in interest-free loans through state banks to finance stalled housing projects across the country. Less than 1% of the funds have been tapped, the Financial Times reported on Sept. 14, as Chinese banks are reluctant to bear the risks of lending to distressed projects.
Editing by Francesco Guerrera and Thomas Shum
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Zhao Youming, 60, looks at an unfinished residential building where he bought an apartment, at the Gaotie Wellness City complex in Tongchuan, Shaanxi province, China September 12, 2023. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
HONG KONG, Sept 18 (Reuters Breakingviews) – Chinese developers are in trouble. Many are struggling to stay afloat as both financing and sales dry up. Why don’t they simply slash prices and sell down their bloated inventory? Well, they can’t. Restrictions imposed after the last property crisis in 2016 were intended to contain runaway home prices. Those limits endured and are now obstructing a recovery in the world’s second largest economy.
“Guidance” set by local governments helped officials to achieve price stability. Average new home prices in the 70 major cities, per official data, have fluctuated around just 2% on a monthly basis for more than a year even as top developers wrestle to restructure their debt. Evergrande (3333.HK) and Country Garden (2007.HK) alone have combined liabilities worth 3.8 trillion yuan ($524 billion).
Yet the restrictions hid distortions. When the mood was bullish, price caps in major cities were far below what people were willing to pay. Crowds of buyers typically flocked to project launches. Those who were lucky enough to be allocated a new apartment could then flip it for a handsome profit in the limited secondary market.
That’s one reason many Chinese viewed caps as a “subsidy” for prospective homeowners. Fast forward, and these controlled prices are much higher than the perceived market value. Some developers have tried to work around the problem, by offering homebuyers “discounts” including car parking lots or even gold bars. Home sales last year fell 27% to return to 2017 level, per National Bureau of Statistics, and sales this year are on course to be worse.
Scrapping the price caps would be a cleaner fix and officials are weighing up such a move, Reuters reported this month. The Guangzhou government has already quietly abandoned its seven-year-old policy in regulating new home prices, according to Caixin, a financial publication. Hard up developers will be able to start generating much-needed cash if more cities follow. Take Country Garden, it had a 202 million square metre landbank at the end of 2022, including 3,000 projects under construction. How quickly it can monetise some of those assets ultimately depends on how attractive the selling prices are.
A price slump would spur demand but the government would need to brave enormous fallout. Existing owners will be unhappy to see the value of their homes tumble: China’s homeownership rate reached 90% by 2020, and real estate accounts for 70% of household wealth. In a weak economy, it is unclear where an undistorted price will settle. Still, finding the bottom of the market looks crucial to any property market revival.
CONTEXT NEWS
China’s Guangzhou city has cancelled price caps on new residential projects, Caixin reported on Sept. 12. Developers still need to share their planned selling prices with authorities but regulators will no longer provide price guidance, the financial publication said.
Price caps of various kinds were introduced in many Chinese cities from 2016 following the central government’s call for a stable residential market.
Editing by Una Galani and Thomas Shum
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
LONDON, Sept 13 (Reuters Breakingviews) – Where is Wen Jiabao when you need him? China’s former premier is remembered for his decision to unleash a huge state spending plan after the 2008 financial crisis. Today’s leaders wish they could deploy similar fiscal firepower to kickstart their sputtering economy. The options before President Xi Jinping aren’t great. Yet letting some heavily indebted local governments’ investment arms fail would be better than keeping them on pricey life support or counting on an elusive rebound in consumption.
Wen exited the political stage a decade ago but his legacy lives on, for better and, mostly, for worse. His plan to throw 4 trillion yuan ($555 billion), or about 13% of China’s GDP in 2008, at everything from railroads to airports contributed to a debt overhang that’s still haunting Beijing today. In the 15 years since, China’s debt-to-GDP ratio has doubled to a whopping 280%, with the bulk of liabilities held by local government financial vehicles (LGFVs).
Most of these 3,000-plus entities were created by local governments during the 2008 crisis to skirt a central government ban on direct state borrowing. They were then contracted by regional governments to build public infrastructure, from uneconomical leisure parks and roads to slightly more cost-effective highways, subway stations and high-speed bullet trains. Many also developed land for regional governments before it was sold on to residential developers. Today those vehicles are a ticking time bomb that hampers China’s ability to spend its way out of the current economic doldrums. Economists are busy downgrading the country’s full-year growth to below the official goal of around 5%, which was already seen as modest, because an initial recovery following December’s pandemic reopening quickly faded. China is flirting with deflation as the property sector – which accounts for a quarter of GDP – has sunk and pandemic-scarred consumers and businesses hesitate to spend.
Xi’s dilemmas are compounded by his belief that the traditional stimulus playbook of boosting real estate has run its course. He has frowned at house prices that made Shanghai less affordable than New York and made an example of over-leveraged developers that disrupted the market, such as China Evergrande (3333.HK), which is struggling to restructure some $300 billion in liabilities. He has eased home purchase curbs recently to stabilise property sales, but they are still on course to decline around 10% this year, per Gavekal Dragonomics.
That leaves much of the heavy lifting to fiscal spending. Yet LGFVs’ debt stands in the way. These vehicles had already accumulated 80 trillion yuan of liabilities at the end of 2022, according to analysts at Guosheng Securities. Of that, 54 trillion yuan was interest-bearing, mostly owed to Chinese banks.
The bulk of these debts are separated from local governments’ balance sheets, but Beijing’s decade-long efforts to sever the implicit guarantee between local governments and their LGFVs have been largely unsuccessful. A third of LGFVs didn’t generate positive cash flow last year, according to Guosheng. And 60% of them, holding about 32 trillion yuan of outstanding debt, would struggle to pay interest with their own EBITDA, Citi analysts estimated. Yet local officials remain reluctant to let them default on public markets, for fear that such a shock would shut their regions’ funding access and even trigger a run on government bonds.
Beijing wants to buy time. Its latest move includes a mooted plan to allow local governments to raise 1 trillion yuan in total through bond sales to repay LGFV debt. The Ministry of Finance may also ask banks to extend loans and slash the interest. Zunyi Road and Bridge Construction, a LGFV in China’s Southwestern Guizhou province, set a precedent earlier this year, as its creditor banks agreed to roll over its loans for 20 years and halved interest on them. Xi could also help by letting local governments shuffle their debt into the state’s balance sheet since the central government has a debt-to-GDP ratio of just 20%.
The problem with these measures is that they wouldn’t reduce LGFVs’ pile of debt. A harsher medicine is needed. The shock therapy option for Beijing is to force a fire sale to raise much-needed cash. LGFVs have 133 trillion yuan in total assets, around 60% of which are in land and physical assets such as industrial parks, transport infrastructure and investment properties, according to Guosheng.
Local officials have pushed back at Beijing’s requests to sell, arguing most of these assets are illiquid, according to the Financial Times. But even if the portfolio of land and fixed assets was put up for sale at a massive 80% discount to entice vulture and bad debt investors, that would raise around 16 trillion yuan, enabling the LGFVs to pay back all their outstanding bonds. At a more optimistic 30% discount, the proceeds would jump to 55 trillion yuan, which would cover all outstanding interest-bearing debt.
Even with asset sales, it’s inevitable that some LGFVs, especially in poorer regions, will have to fail. Beijing fears that would break the banks. S&P analysts calculate that about 20 trillion yuan of LGFVs’ loans may be at risk of restructuring. Letting these loans roll over with interest slashed – as in Zunyi’s case – would result in a 5 trillion yuan hit to bank capital, and reduce banks’ average capital adequacy ratio by 2.6 percentage points to 12.6%; that’s still within regulatory requirements.
The stakes are high. Despite Xi’s distaste for propping up the economy through real estate, the danger is that a fire sale of LGFVs’ assets could spark a widespread fall in the value of collateral for bank loans and cause a deeper crisis of confidence. That, in turn, might deal a considerable blow to lenders’ balance sheets and destabilise the financial system.
That said, the banking sector is sitting on 335 trillion yuan of total assets, and bad loans, impairments and provisions will only be an issue once lenders come clean on them. So far, they are not. As of June 2023, Chinese commercial banks claimed that non-performing loans were just 1.6% of all loans. Investors have already priced in more damage and pushed the average valuation of those listed to less than half of book value.
The makeup of China’s growth makes drastic action on LGFVs even more imperative. Unlike in the United States and other Western countries, China’s growth is still driven by investment rather than consumption. Investment as a share of GDP is a lofty 40%, according to Oxford Economics, double that of the United States.
Chinese households have ample savings, having accumulated 17.8 trillion yuan of bank deposits last year alone. But darkening job prospects, a diminishing wealth effect from real estate, and scars from years of pandemic lockdowns have made them extremely reluctant to spend them.
If Xi won’t boost property wholeheartedly and is not able to count on consumers, his efforts to revive China’s growth have to focus on smashing the great wall of local debt.
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CONTEXT NEWS
Global rating agency Moody’s on Sept. 1 revised down its 2024 GDP forecast for China to 4% from 4.5%. It maintained that China’s economy will grow at the rate of 5%, the official government target, in 2023.
China’s monthly economic update for August, including that on industrial output, fixed asset investment, property investment, retail sales and others, will be released on Sept. 15.
Editing by Peter Thal Larsen, Sharon Lam and Aditya Sriwatsav
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
An Airbus A319 can be seen flying 500 feet above the ground while on final approach to land at LaGuardia Airport in New York City, New York, U.S., January 6, 2022. REUTERS/Bryan Woolston Acquire Licensing Rights
BRUSSELS, Sept 4 (Reuters Breakingviews) – Short flights within Europe are frequent flyers on wish lists of things to ban. In the name of cutting carbon dioxide emissions, countries from Germany to Spain are proposing to prevent brief air trips, and lobbyists like Greenpeace say governments should require travellers to choose trains or other ground transport for shorter journeys. But not all short flights are alike, and banning commercial hops makes less sense than targeting private jets.
In 2022 aviation emitted 800 million metric tons of CO2, around 10% of the world’s 8 billion tons of CO2 emitted annually by various means of transport, according to the International Energy Agency. In the same year European Union emissions were around 2.5 billion tons and in the recent past flying has contributed about 4%. But most of that is long-haul flights. A 2022 study of 31 European countries found that flights shorter than 500 km account for 28% of departures, but under 6% of fuel burnt.
Commercial jets do pollute more than ground transit, but they also have advantages that can’t be easily matched. To avoid a disproportionate impact on disabled passengers and others en route to more distant destinations, train services need to catch up first. Denying a short flight to connecting passengers could just send them to their cars, according to KLM CEO Marjan Rintel.
Limiting private jet travel would make a bigger difference, with fewer broad-based disruptions. Private jets have a far bigger impact per passenger on the environment than their flying-bus counterparts: as much as 45 times the amount of emissions per passenger, according to the Institute for Policy Studies. Greenpeace data shows that private jet flights in Europe put out 3.4 million tons of CO2 in 2022, twice 2021 levels, and mostly on flights with a range of less than 750 km.
Short-haul bans are especially beside the point when they look more like industrial policy than climate action. In France, where domestic connections are already prohibited for journeys of under two and a half hours, only three routes were actually banned, with projected savings of just 55,000 tons of carbon dioxide output per year. Shuttering unprofitable routes and prohibiting new competition on those legs acted more like a leg-up for Air France’s business plan, according to Davy transport analyst Stephen Furlong.
In any case, there’s a positive non-climate economic case for short-haul flights. They have allowed upstart carriers like Norwegian Air to challenge legacy airlines and rebuild after the pandemic. Connecting flights also make it possible for Brussels Airlines to serve as a hub for passengers in and out of Africa, a lifeline for countries whose livelihoods depend on travel routes.
There’s a case for phasing out shorter flights over time, and for surcharges like Belgium’s 10 euro tax on flights of less than 500 km. But banning brief mass-transit trips now is a hop too far.
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CONTEXT NEWS
Countries such as France, Spain, Belgium and Germany have enacted or are considering measures to reduce or ban short flights. The European Union’s long-term mobility plan calls for discouraging plane travel where lower-impact alternatives exist.
Direct emissions from aviation accounted for 3.8% of the EU’s total carbon dioxide emissions in 2017, according to the European Commission. Aviation is responsible for 14% of transportation-sector emissions.
Greenpeace research found that the number of European private jet flights jumped from 118,756 in 2020 to 572,806 in 2022, with carbon dioxide emissions going from about 355,000 metric tons to 3.4 million tons over the same period. More than half of 2022 private jet travel was for distances of less than 750 km.
Editing by George Hay and Oliver Taslic
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
HONG KONG, June 29 (Reuters Breakingviews) – There’s plenty to like about Swire Pacific’s (0019.HK) Coca-Cola sale. The Hong Kong-based property-to-aviation conglomerate on Wednesday evening said it is handing its U.S. drinks subsidiary to its parent for $3.9 billion, allowing it to pay a tasty dividend, cut net debt and still run the division for a fee. It’s a sweet deal for investors, as long as property, airline Cathay Pacific (0293.HK) and other holdings recover soon.
Around $1.5 billion from the expected proceeds will be distributed back to shareholders, while the rest will go towards strengthening Swire’s balance sheet. Both are welcome moves. Net debt at Swire is expected to fall by a third, to HK$38 billion ($4.9 billion) after the sale. The expanded cash pile will be able to cover 7.3 times the company’s borrowing costs, compared to 6 times at the end of last year – a useful buffer amid rising interest rates. Moreover, a special dividend equal to more than what the company has paid out over the past three years combined looks generous for investors who have seen Swire’s Hong Kong shares return a negative 13% since the start of 2023.
Operationally, not much changes. As part of the transaction the Hong Kong-based group has a 13-year contract to keep running Swire Coca-Cola USA, which will allow the conglomerate to maintain its lucrative manufacturing, marketing and distribution deals with the global drinks behemoth. It’s a clever way to dispose an asset without having to part with the business.
For such a cosy deal – the buyer is Swire’s 60%-controlling shareholder John Swire & Sons – the price looks satisfying too. At the implied 12.4 times enterprise value to adjusted 2022 EBITDA, the unit is valued just shy of $30 billion Coca-Cola Europacific Partners (CCEPC.L), which boasts superior margins and growth.
Little wonder Swire’s Hong Kong shares rallied as much as 8% on Thursday morning. Even so, the stock still trades at a dismal 50% discount to its net asset value, per Citi estimates. A property slump in Hong Kong and China, combined with a tough recovery for Cathay Pacific to bounce back to pre-pandemic levels, has weighed on the conglomerate, which owns 45% of the city’s troubled flagship carrier. The Coke sale is refreshing for investors, but only until the rest of Swire Pacific regains its fizz.
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CONTEXT NEWS
Hong Kong conglomerate Swire Pacific on June 28 announced it will sell its Swire Coca-Cola USA subsidiary for HK$30.4 billion ($3.9 billion) in cash to its 60%-controlling shareholder, John Swire & Sons. The company expects a gain of HK$$22.8 billion.
Upon completion of the sale, Swire Pacific will distribute HK$11.7 billion in special dividends to its shareholders. The company also plans to enter into a 13-year agreement to provide management services to Swire Coca-Cola USA and receive an annual fee of at least HK$117 million.
The deal is conditional upon the approval of independent shareholders.
Swire Pacific’s Hong Kong shares were up 5.5% to HK$61.00 on during early morning trading on June 29.
Editing by Antony Currie and Thomas Shum
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WASHINGTON, May 30 (Reuters Breakingviews) – The U.S. government could soon shrink one of its most promising investments. The budget deal agreed to by President Joe Biden and top congressional Republican Kevin McCarthy would move $20 billion away from the Internal Revenue Service over the next two years. The change shores up cash for other agencies, but projections suggest the IRS funding would’ve made a significant step toward closing the government’s $925 billion budget gap.
Biden approved $80 billion of new cash for the IRS in 2021, arguing the funding would strengthen enforcement and increase revenue collected by Uncle Sam. The non-partisan Congressional Budget Office backs that assertion. The CBO estimated in 2021 that for every $1 increase to IRS funding the government would recoup $6.40 to $7.10. The $20 billion being diverted from the agency could therefore raise as much as $142 billion through 2031.
White House officials have said the deal shouldn’t weaken tax collection. That’s unhelpful. The shift erodes one of the most obvious solutions to the government’s deficit problem: Improving enforcement is akin to, or even better than, raising taxes. With the deficit set to double over the next decade, America’s tax collector could use the help. (By Ben Winck)
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NEW YORK, April 5 (Reuters Breakingviews) – In baseball, when fans turn their caps backwards or inside out it’s a kind of prayer that their team can turn its fortunes around. The commercial real estate industry has a different kind of backward cap – one that’s also a sign of a losing streak.
Anxiety over U.S. commercial property has been heightened by the collapse of two banks, one of which – Signature Bank – was an active real estate lender. Building-related debt has been the cause of crises before. Lehman Brothers’ purchase of apartment company Archstone in 2007 was one reason for its eventual bankruptcy.
The problem this time is a key real estate metric called the “cap rate.” Nothing to do with headgear, this rate reflects the yield on a property, comparable with the yield on a bond. The cap rate comes from dividing a property’s net operating income in any given year – money from rent minus associated costs – by the asset’s value. Ideally, and almost always, it’s higher than the rate at which the owner can raise debt to fund their purchase.
For more than 10 years, that gap remained positive even though cap rates were falling in virtually all real estate subsectors, from shopping malls to apartments. That was mostly a consequence of low interest rates. And the spread made it possible for asset prices to keep rising even though rents, a major driver of net operating income, weren’t going up much. As recently as 2020, the spread was as high as three percentage points.
That narrowed suddenly when the U.S. Federal Reserve turned course and started putting interest rates up with unprecedented speed. For the first time since just before the financial crisis, the baseline cost of debt – the 10-year Treasury – is higher than the yield the owner will get on a building – a situation known in the industry as “negative leverage.” When a new investor risks getting a yield that’s less than the cost of debt, the obvious thing is for them to demand a steep price cut.
Ask a large-scale real estate owner – or several – about this and they are characteristically optimistic. They’ll say the rents on the buildings they own are about to rise, too. Have no fear: Their cap rate growth will outpace the increase in rates, and this inversion will soon revert.
But that’s only true for some. One factor is the type of property: There’s still a shortage of good rental homes, retail rents are rising, and warehouse vacancy rates are relatively low. But office valuations are struggling. The other variable is location. Real estate consultancy Trepp found that in San Francisco, more than 60% of office property loans were close to or in default; so were almost 40% in Washington, D.C. Last month, the Real Deal trade publication reported that Brookfield Properties, a majority owner in New York skyscraper One Liberty Plaza, was trying to buy back the other 49% for a third less than what private equity firm Blackstone (BX.N) paid for the stake six years ago.
One further problem is that changing work habits have spoiled the math of rental increases. Vacancies in the office sector are at 18% on average, up from 12% in 2019, according to the National Association of Realtors. If tenants don’t renew, it puts pressure on net operating income. The spread between the cap rate and cost of debt makes a big difference then, because leverage magnifies the effect of falling income on the equity investor’s cash flows.
Take a fictitious property investor, Brookrock Global. Say it bought a property three years ago with $10 million of net operating income and a yield of 5%. That deal would imply the building is worth $200 million. But if some tenants don’t renew, and others renegotiate, net operating income might fall to $7 million. If Brookrock tries to sell, a new buyer might look at interest rates close to 5% and demand a cap rate of 7%. In that scenario, the value of Brookrock’s building is cut in half.
This fictional example is about to become reality as a wave of refinancings approach. Some $600 billion of commercial real-estate debt is coming due this year and next, according to Cushman & Wakefield, the vast majority of it issued when rates were lower. Lenders will look at new, lower valuations and reassess the amount they’re prepared to lend. If Brookrock borrowed 60% of the value of its building in 2018, and a bank will only lend 60% of its valuation today, the owners must find $60 million from somewhere to pay back its original loan.
When Lehman Brothers went bankrupt, the narrowed spread between cap rates and interest costs didn’t last for long. The Fed started to cut rates to save the economy. With inflation running high, that looks unlikely today. And if rates don’t move, and nor does operating income, that leaves valuations to take a big hit.
Baseball fans call their backwards-and-inside-out headwear a “rally cap.” And usually it’s seen when a comeback looks nearly impossible short of a real stroke of luck. Real estate investors will need even more than that.
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Editing by John Foley and Amanda Gomez
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HONG KONG, March 1 (Reuters Breakingviews) – Hong Kong offices are emptier than in other Asian financial centres. While its borders are open and the city has dropped its mask mandate, a recovery looks tough. Commercial real estate space is growing, and there are fewer tenants.
Overall prime office vacancies in the hub rose to over 12% in the three months to December, up from less than 10% last year, according to property consultancy JLL. Singapore and Tokyo boast rates well under half of Hong Kong’s level, and figures there are either improving or roughly unchanged. Premium office rents in the gateway to China have fallen nearly 30% since mid-2019.
Most worrying is waning interest from the People’s Republic. Last year, mainland-based companies accounted for less than 6% of all leases in Hong Kong’s key Central business district, from nearly 30% in 2019. Ongoing weakness in the world’s second-largest economy means those tenants may be slow to return.
Some developers have fared better than others. The $10 billion Hongkong Land (HKLD.SI), the largest landlord in the Central district, maintained an enviable vacancy rate of around 5% during Covid. Elsewhere, the vacancy rate hit 21% last year at CK Asset-owned (1113.HK) Cheung Kong Center, home to Goldman Sachs’ (GS.N) main office. Meanwhile, HSBC (0005.HK), (HSBA.L) financiers in the city are fretting over losing their private offices as the bank aims to cut its non-branch real estate by 40% globally on pre-pandemic levels, though a person familiar with the situation told Breakingviews the reduction may not apply to the city.
Positive signs are emerging. Invesco’s recent 10-year deal for a lease in Jardine House, walking distance from the IFC mall, shows tenants have won some pricing power, since earlier agreements typically lasted for two to three years. But it is a vote of confidence in the city’s long-term potential. And it’s not just financial groups: auction houses Christie’s, Phillip’s and Sotheby’s, are all expanding their Hong Kong presence.
Even if business optimism is returning, office supply in Hong Kong is set to rise by 3 million square feet, roughly 3%, this year as new towers such as the Henderson and Cheung Kong Center II come onto the market. Hong Kong’s economy shrunk for three of the last four years, and its population is slimming too. Floored landlords will be eagerly awaiting the return of companies from mainland China.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add chart.)
CONTEXT NEWS
Senior investment bankers at HSBC in Hong Kong could lose their private offices as the firm moves towards open-plan desks for the financial hub, Bloomberg reported on Feb. 28, citing unnamed sources. The bank’s main building in Central is currently undergoing renovation.
The firm is looking to cut non-branch-based commercial real estate by 40% globally compared to pre-pandemic levels, HSBC said in 2021. However, the plan to reduce its office footprint may not apply to Hong Kong, a person familiar with the situation told Breakingviews.
Editing by Una Galani and Katrina Hamlin
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
HONG KONG, Jan 11 (Reuters Breakingviews) – Beijing’s efforts to cap developers’ leverage are backfiring. The “three red lines” policy on debt ratios has begun aggravating market stress and impairing balance sheets.
Frustrated by the ineffectiveness of efforts to curb speculation by hiking mortgage down payments and similar measures, regulators led by banking chief Guo Shuqing stiffened policy in 2020. They introduced formal caps on three key ratios: debt-to-cash, debt-to-assets, and debt-to-equity. Those on the wrong side of those lines found themselves almost entirely locked out of credit markets. The theory was this would compel developers to cut back on overzealous land purchases that pushed up prices, sell off excess inventory, and issue more equity to get their balance sheets back in line.
The ensuing pain was immediate and acute. Unable to refinance itself, Evergrande (3333.HK), China’s second-biggest developer, began defaulting on some of its $300 billion of liabilities, as did other peers. They also failed to complete pre-sold apartment projects in time, prompting some buyers to halt their mortgage payments.
With developers and worried investors dumping apartments onto the market to raise cash, and the rest of the economy cooling, home prices started falling. Sales volumes contracted 25% last year. Constricted cash flows made it even harder for developers to pay down debts. Indeed, the average net-debt-to-equity ratio at China’s top 80 real estate companies rose to 152% by the second quarter of 2022, nearly double what it was in mid-2020, per analysts from state-owned Chinese Academy of Social Sciences. The number of companies exceeding the cap on the debt-to-cash ratio increased too. In short there are now more property firms on the wrong side of the red lines than when the policy was first rolled out, and even the most financially healthy are struggling.
Beijing is already backing off. Officials have nudged state banks to extend more credit to some developers and facilitate acquisitions. They are also mulling letting companies in good financial condition raise debt by more than the current 15% annual limit, per Bloomberg. However, the three red lines remain in place for now. The sooner they are blurred, moved or erased, the better.
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CONTEXT NEWS
China’s home sales are expected to slip by a median of 8% this year, a Reuters survey showed on Jan. 6, compared to a slump of around 25% in 2022.
The People’s Bank of China said on Jan. 5 that in cities where new homes prices have fallen both month-on-month and year-on-year for three consecutive months, the floor on mortgage rates can be lowered or abolished for first-time home buyers.
Editing by Pete Sweeney and Katrina Hamlin
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