Hong Kong Curbs Lending to Developers as Property Risks Soar

(Bloomberg) -- The Hong Kong Monetary Authority tightened limits on bank loans to property developers, as it seeks to contain risks in the city’s booming real-estate market.

From June 1, the caps for construction finance will be cut to 40 percent of site value and 80 percent of construction cost, with the overall limit reduced to 50 percent of the expected value of completed properties. For developers with weaker finances, banks should consider deeper cuts, the monetary authority said in a statement Friday.

Local institutions should set aside an adequate amount of capital for exposures to developers offering high loan-to-value mortgages, it said. Lending by some developers had been “inconsistent” with prudent practices, the HKMA said. Total mortgage loans by major developers amounted to HK$27.6 billion ($3.5 billion) as of December 2016, up from HK$14.2 billion six months earlier, the HKMA said.

Hong Kong’s property market, the world’s least affordable, has been on a tear despite attempts by the city’s leaders to cool prices in November by imposing additional taxes. Developers, which unlike banks aren’t subject to mortgage loan limits by the HKMA, have been increasingly aggressive in offering funding to buyers, prompting warnings from Hong Kong’s de facto central bank that risks are rising.

Last month, the HKMA expressed concern about the riskiness of mortgages with high loan-to-value ratios issued by developers, as some analysts warned that property prices in the city are unsustainable. Analysts including Cusson Leung at JPMorgan Chase & Co. said that any external shocks could trigger tighter liquidity in the city’s banking system and increase home buyers’ borrowing costs.

Prices of existing homes in Hong Kong have surged to records as buyer demand has remained brisk and developers have lured buyers with incentives and loan offers. Hong Kong’s secondary private residential property prices rose 0.5 percent in the week ended May 7, Centaline Property Agency said on its website Friday, bringing the increase this past year to more than 21 percent.

The HKMA said Friday that some developers involved in recent land acquisition and development projects relied heavily on debt and banks financing them may in some cases face a “substantially higher level of credit and moral hazard risks.”

Some real estate developers have been aggressively bidding for sites in Hong Kong, HKMA’s Deputy Chief Executive Arthur Yuen said in a briefing Friday. Some developers are using high leverage for financing and borrowing from different banks, he said.

In one indication of heated competition for land, nine developers are bidding for a rare commercial project site in central Hong Kong on Murray Road, according to Radio Television Hong Kong.

--With assistance from Jasmine Wang

To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Hong Kong at sbhaktavatsa@bloomberg.net, Alfred Liu in Hong Kong at aliu226@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Paul Panckhurst