Moody’s: Hong Kong property developers’ earnings and credit quality to remain healthy in 2017-18

Moody’s Investors Service says that the earnings and credit quality of the nine Hong Kong property companies that it rates will be stable for fiscal year 2017 and 2018 when compared to fiscal 2016.

“We expect that for fiscal 2017 and 2018, the nine companies’ absolute EBITDA will be stable, owing to the strength of their office rental income and good asset quality,” says Stephanie Lau, a Moody’s Assistant Vice President and Analyst.

“Overall, the companies should also all maintain their credit quality and ratings for the next 12-18 months, owing to their stable financial metrics and good liquidity,” adds Lau.

Moody’s analysis is contained in its just-released report titled “Property — Hong Kong: Rated Companies’ Earnings and Credit Quality Will Remain Healthy in 2017-18,” and is authored by Lau.

Of the nine property developers that Moody’s rates, Moody’s says that three — Sun Hung Kai Properties Limited (Sun Hung Kai Properties (Capital Market) Ltd. A1 stable), Cheung Kong Property Holdings Limited (A2 stable) and Link Real Estate Investment Trust (Link REIT, A2 stable) — will outperform their peers in terms of earnings growth.

On the issue of earnings, Moody’s expectation of stable earnings over the next two years reflects Moody’s assumption that a steady growth of office rental income will compensate for a weakening in retail mall rental rates.

With the office segment, Moody’s says that the moderate positive rental reversions for the sector will continue, registering 5%-10% over the next 12-18 months for Grade-A office space. This situation is driven by continued solid leasing demand, and limited supply in Hong Kong’s Central business district, where most of the properties in Moody’s-rated companies’ portfolios are located.

On the retail market, Moody’s expects the negative pressure on retail rental reversions to ease, with stabilizing retail sales and high occupancy rates. Specifically, shopping mall rental rates in Hong Kong will likely fall by around 5% over the next 12-18 months, but the nine developers will be able to maintain their average rental rates, as seen by their strong average 96%-99% occupancy rates recorded in 2016, as well as their well-staggered leases and proactive lease management.

As for the strong primary residential pre-sales in Hong Kong, Moody’s says that such results are credit positive for the developers’ cash flow and future revenue recognition, but it is uncertain whether or not the historically high residential prices will be sustained. Risk factors include: 1) a decline in investment demand for properties, after the government closed a tax loophole on 12 April 2017 that allowed first-time home buyers to buy multiple flats in one contract; and 2) a decline in systemwide liquidity.

While leverage will likely rise for several companies, overall, the nine developers’ strong liquidity and sufficient ratings headroom should mitigate any pressure on their ratings.

All nine Moody’s-rated Hong Kong property companies’ ratings carry stable outlooks.

Key downside risks for the developers include a sharper-than-expected correction in Hong Kong’s (Aa1 negative) and/or China’s (Aa3 negative) economic growth, a weakening of market liquidity or tightening of monetary conditions. Moody’s points out that all these factors would dampen housing and leasing demand.

Source : Moodys

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