Only a few days after the most significant property transaction ever recorded occurred in China’s property sector or to be precise in Hong Kong, China’s central bank chief warned of ‘sudden, contagious and hazardous’ risks growing in the region’s financial system.
At the beginning of November, a landmark skyscraper owned by Hong Kong’s richest man Li Ka-shing sold for a record price of more than $5 billion– a record for a Hong Kong office tower.
Only a few days after the tower changed hands, central bank governor Zhou Xiaochuan, wrote in a lengthy article published on the People’s Bank of China’s website that risks are accumulating within the region, including some that are “hidden, complex, sudden, contagious and hazardous.” The post went on to say that the government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions. Zhou also called out China's high debt levels stating, “High leverage is the ultimate origin of macro-financial vulnerability," and “In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”
However, despite growing concerns about Chinese and Hong Kong property prices, analysts at rating agency Moody's believe there's still plenty of upside available for real estate investors going forward.
China's Property sector nubble Shows No Sign Of Slowing, especially in Hong Kong
A new report from the agency on the state of the China's property sector with a focus on HK market claims "primary residential total annual pre-sales value in 2017 and 2018 to be between HKD220 billion and HKD230 billion, compared to HKD183 billion in the first nine of months of 2017 and HKD187 billion in 2016."
As well as higher property sales values, Moody's is also projecting office and mall rates to continue rising. The average rental reversion in Hong Kong's Grade-A office market is expected to range between 0% and 5% while a recovery in retail sales will likely result in shopping mall rental rates to register a flat to a modest increase of 0% to 5% in the next 12 to 18 months.
"Hong Kong retail sales grew 0.9% year-on-year in the first nine months of 2017, according to data from the Hong Kong Census and Statistics Department. We believe rated operators can maintain their average rental rates owing to their strong 96%-100% occupancy rates, which have remained largely unchanged since 2015."
As rents rise, and property transaction volumes trend higher, it's expected debt to EBITDA ratios at some of Hong Kong's largest real estate firms will decline. Specifically, Moody's calculations show that the weighted average debt/EBITDA will "trend slightly downward to around 2.8x-3.0x in fiscal 2017 and 2018 from 3.2x in fiscal 2016." Meanwhile, adjusted EBITDA/interest is projected to "remain stable at 10.2x-10.4x, compared with 10.9x in fiscal 2016."
China's property sector: Stable outlook ?
Moody's believes that the China's property sector in HK H will see stability for the next few years, and thanks to government intervention, barring any unforeseen developments, the same is expected to be true for China's property market.
According to a presentation issued by the rating agency, Chinese property prices are expected to remain stable in Tier one cities but fall slightly in Tier Two and Tier Three cities as demand slows over the next few years.
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