Hong Kong Property Sector Rebounds But Caution Required

[HenryTo]

One way to gauge the economic performance in China is to look at HK property prices. One because information in the Mainland is very opaque and two because wealthy individuals and investors in the Mainland tend to invest their excess money in HK real estate.
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Hong Kong Property Sector Rebounds But Caution Required: S&P

HONG KONG, July 6 Asia Pulse - The property sector in Hong Kong recovered strongly in 2004 but the outlook for the next 12 months is less certain, according to a new report released today by Standard & Poor's Ratings Services on Wednesday.
Fueled by a solid economic recovery and positive market sentiment, the sector started picking up in 2003 and 2004, according to the report, entitled "Hong Kong Property Review: Sector Rebounds But Caution Required."

The report said the luxury residential market has been the prime beneficiary of this trend, with speculative investors returning to the market, but the retail and office property sectors have also been very active.

As a result of these improved market conditions, most property companies have delivered a meaningful recovery in margins and improved profitability. The financial ratios for rated property companies in Hong Kong are now at levels sustainable for their respective ratings.

The report added that rating outlooks in the sector have nearlyall moved back to stable from negative over the past twelve months. Looking ahead the outlook for the property sector is less certain than it was a year ago. On the positive side, office property investors are starting to enjoy positive rental reversions, while improved tourist spending and domestic retail sales are likely to lead to solid growth in retail rentals.

However, the outlook for the residential property sector is more challenging with rising interest rates cooling down the market and reducing investment demand. In recent years, unprecedented capital inflows have kept mortgage rates in Hong Kong at historically low levels, according to the report.

But since April, banks in the territory have been raising their mortgage lending rates. Without cheap money, buyers, especially inthe top-end luxury property sector, are becoming more cautious, the report said.

Although the market faces a decline in supply, the prospective level of demand will be the key factor in determining the direction the market takes. Nevertheless, Standard & Poor's expects property companies to maintain appropriately conservative financial profiles.