January 21, 2014 / 2:06 AM / 4 years ago

Fitch: Fast churn-out essential for HK developers on rising supply

(The following statement was released by the rating agency) HONG KONG, January 20 (Fitch) Fitch Ratings says that Hong Kong (HK) developers will have to adopt a fast churn-out model as the HK government has shown its determination to increase the residential land supply in the next decade. Developers will face declining margins for their property sales in the medium term as prices fall. Those who can shorten their development cycles will have lower inventory holding risk, and hence, more stable cash flow and steadier profit margins. The HK government adopted 470,000 residential units as the supply target in the next decade. Although a bulk of Home Ownership Scheme (HOS) units will only be available for pre-sales from 2017, Fitch expects the private residential supply to increase significantly to over 15,000 units per year through pre-sales from 2014. This is because the substantial amount of land parcels sold since 2010 will gradually be available to the market through pre-sales in the near term, putting downward pressure on housing prices. The latest Centa-City Leading (CCL) Index released on 17 Jan 2014 reached a one-year low of 117.71 and is down 4.8% from the peak in March 2013. In the previous property boom cycle in 2003-2013, HK developers enjoyed widening profit margins by taking a longer period to develop their projects when prices were appreciating. This may be due to their objective of earning better margins or various government approval processes which slowed down the pace of construction. In view of the rising land supply and falling prices, HK developers, most of whom have high exposure to mass market housing, may have to adopt a quicker turnover model. Otherwise, their project margins will be squeezed later, especially for those which acquired land actively in the past two years. As a fast churn-out model can reduce inventory holding risk, developers can minimise the impact of compressing margins by shortening their development cycles and recycling their capital to replenish their land-bank at a lower cost during property downturns. Secondly, a fast-churn model allows developers to utilise their capital more efficiently, generating a bigger volume of sales with the same amount of capital. Lastly, future land supply will be sufficient for developers to adopt the fast churn-out model. Fitch expects developers to continue applying for pre-sales approvals at an earlier stage of project development in order to secure better margins at the current pricing levels. Developers will be more proactive in property sales in the next two to three years before the substantial amount of HOS units come on to the market in 2017. Contact: Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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