By Barry Lau, Managing Partner & CIO (Private Investments)
Hong Kong has announced a new measure to curb the residential rally, 15% Stamp duty on all Second Home Purchase.
We anticipate transaction volume will drop by c.30-40% when compared with the previous home price rising period (April 2016 to October 2016) at 5,456 deals per month. We believe the new policy has the effects of reducing the number of speculators and deferring some first-time buyers from buying in anticipating a cheaper entry point in the correction. Putting things into perspectives, stamp duty alone will increase by up to 9x under the new policy: previously buying a second home at e.g. HK$2mn (can’t really get much admittedly…) a buyer needed to pay HK$30,000 as stamp duty; but now, under the new tax rate the buyer needs to pay HK$300,000. The above said, there is still a supply shortage of 2,000-5,000 units per annum for the next 3 years (2017-2019 annual new private supply at 18,100 units).
Progressive policies installation in relation to curbing of a real estate bubble has been in place as a response to central banks’ hobby in over-zealous money printing activities in the past few years. Hong Kong is the world’s gateway to China, and vice versa, cheap money awash around the world, hard assets were and will continue to be bid over the medium to long term. It is not owning a pad in Shanghai, Shenzhen or Beijing that is the status symbol, the de rigueur is to have a place in Hong Kong for the newly minted Chinese middle class, which stands at 300m people strong. Hong Kong being a 7m city, can easily be dwarfed by the demand from China alone, let alone people from the rest of the world who are fleeing countries that have been grounded to a halt (low to negative growth), government instilled austerity measures and huge tax increases… We believe there will be a shakeout but the housing market will remain bid by real demand.
As to our business in credit, we do not believe there will be any material impacts. Below are thoughts not in relation to our portfolio as we have not been focused on real estate direct lending in recent years, but generally across the industry:
1. In relation to existing security package comprising real estates, subject to the conservativeness of the underwriting at the time of the lending, a material correction may cause the LTV to be breached. We believe there may be temporary re-valuation risk but such risk will be offset by the continued demand by buyers once the correction is over.
2. New underwriting will need to be more conservative to take into account the laggard effect of the potential re-valuation risk. It is also important to consider further policies introduced, e.g. further tightening on bank lending for mortgage approvals.
3. Developers credit rating will likely take a hit, lending provided to listed developers will in particular need to price in a better premium. Given where we are in the cycle and that (especially liquid) credits are generally quite rich in our opinion, there may be a better opportunity to invest in the secondary market in the new year in the existing credits offered by such developers (subject to one’s ability to buy them) when the full force of the slowdown will have been seen by the year-end earnings impact experienced by these developers. Look for opportunities to buy from forced sellers due to downgrades.
4. Given 3 above, we believe there may be renewed opportunities in direct lending to developers thus as such developers may not be able to issue new debt due to the dislocated prices of the secondary debts and for extension or refi risks they may have to consider using more direct lending as a result.
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