Home deals crashed 27% in January to February

Prices could fall by another 10-20% by end-2020.

Residential property transactions will remain listless throughout H1 2020 following a 27% drop YoY in January and February, but secondary home prices have been relatively strong, according to a S&P Global Ratings report.

The COVID-19 pandemic will add to the economic stress brought about by the civil unrest in H2 2019, with home prices dropping 8% from the peak in late June 2019 to a level similar to end-2018. Prices could fall by another 10-20% by end-2020 from the June 2019 peak, the report said.

"Hong Kong's residential property market is supported by structural undersupply and low interest rates," said analyst Edward Chan. "Furthermore, last October's relaxation on the level of cash down payments for housing loans also underpins the sector."

S&P-rated developers have enough cash to cover short-term debt maturities and expenses amidst lukewarm sales, the report wrote, despite their exposure to the embattled hospitality and retail sectors. Considering a sustained decline in retail sales since February, rated landlords could face negative retail rental reversions this year, the report added. Social distancing measures could further shrink time frames and slash footfall and spending.

Steeper negative rental reversions are expected for rated landlords operating mid- to high-end retail outlets as luxury sales have been hit harder, plunging 42% YoY from August 2019 to January 2020, compared with non-luxury goods. Rental pressure is less for those who operate in a mass market retail niche and those exposed to industrial rental properties, S&P said.

On the other hand, office rentals are more safeguarded as they tend to be longer term and less consumer-driven. High-grade office properties have so far been impacted less, and Grade-A offices in January were still at levels comparable to the year before. However, vacancy rates rose from 4% to 6.7% in January for central locations, and if this trend continues, rated landlords’ office rental reversions will crumble, S&P warned.

“Stress tests amidst last year's unrest indicate most developers could absorb simultaneous 20%-40% declines in both rental income and residential prices without breaching downgrade triggers. This is because the companies have built buffers from previous years of record rents and price gains, though major land acquisitions have eaten into some of these cushions, e.g., acquisitions by Sun Hung Kai Properties in late 2019 and Hongkong Land Holdings in early 2020,” Chan said.

Rated property companies have so far been largely resilient because rental drops take time to feed into tenancy expiries, and home prices have still only moderately fallen. However, the global pandemic is not yet under control, and is fueling a looming global recession, the report concluded.