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Fitch: Leasing Income to Support Hong Kong Property Firms in Housing Downturn
November 20, 2013 / 2:41 AM / in 4 years

Fitch: Leasing Income to Support Hong Kong Property Firms in Housing Downturn

(The following statement was released by the rating agency) HONG KONG, November 19 (Fitch) Fitch Ratings says that the recurring leasing income of Hong Kong property companies will support their strong credit profiles, even though the housing market in Hong Kong is expected to weaken. Hong Kong housing prices reached a plateau in 1H13 and have remained flat. Housing transaction volume is at very low levels, comparable to that seen in 2003 when Severe Acute Respiratory Syndrome (SARS) paralysed the city. Tough restrictions on the housing market have driven away investor and overseas demand, leaving only local end-user demand to drive sales. But even this segment of demand has been suppressed by expectations that home prices will decline. Fitch believes that Hong Kong developers' contracted sales will decline in the next one to two years. Fitch expects the balance sheets of Hong Kong property firms to remain strong, even if housing prices fall by more than the market's consensus, primarily because domestic property sales are not a major contributor to their EBITDA. Among Fitch-rated companies (including Sun Hung Kai Properties (SHKP), Wharf, Hongkong Land, Hysan and Swire Properties), the contribution of Hong Kong property sales to total EBITDA ranged from 0% to 29% in 2012. Instead, property leasing, which provides recurring income, has become an important source of their cash inflows. Investment property income, in particular from shopping centres, has been resilient in the past property downturns due to extremely limited retail property supply. We expect the recurring income EBITDA interest covers of Fitch-rated property firms, which exceeded 4.5x in 2012, to remain strong even if the Hong Kong housing market deteriorates. Some property firms, such as SHKP, have also invested considerably on mainland China. Their property projects in China fare well and are not likely to be affected by a downturn in the Hong Kong housing market. Their China exposure will help offset the cash-flow volatility of their Hong Kong property sales. The property developers that Fitch does not rate (such as Cheung Kong, Henderson Land, New World Development and Sino Land) and have stronger focus on property sales also possess strong balance sheets, underpinned by a considerable amount of recurring income. They are flexible on land acquisitions as they have accumulated sufficient land in the past few years. These firms have experienced the previous property downturn in 1997-2003. Thus, they are now more financially prudent and maintain low leverage. Contact: Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 2801, 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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