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Hong Kong’s property boom at risk with stocks flashing warning signs

HONG KONG — Hong Kong home prices are the highest relative to shares of the city’s publicly-traded developers in almost two decades. For Bocom International Holdings analyst Alfred Lau, that’s a sign that the property market’s about to drop as much as 20 per cent.

A passer-by walks along a riverside as City One Shatin residential precinct is seen at background in Hong Kong, China. Photo: Reuters

A passer-by walks along a riverside as City One Shatin residential precinct is seen at background in Hong Kong, China. Photo: Reuters

HONG KONG — Hong Kong home prices are the highest relative to shares of the city’s publicly-traded developers in almost two decades. For Bocom International Holdings analyst Alfred Lau, that’s a sign that the property market’s about to drop as much as 20 per cent.

The Hang Seng Properties Index slumped 15 per cent this quarter through last week, even as a gauge of Hong Kong housing prices compiled by Centaline Property Agency rose to a record. The stock gauge is at the lowest compared with the real estate measure since 1998, when the city’s last property bubble was bursting.

“We’re just at the beginning of the correction cycle for physical property prices,” Bocom’s Mr Lau said. “We expect a 10 to 20 percent decline in prices. Shares are already pricing in a 10 to 15 per cent decline.”

While home values kept rising in August, sales showed signs of a slowdown. The number of transactions tumbled 37 percent from a year earlier amid concern about China’s economic outlook and the prospect of higher borrowing costs as the Federal Reserve prepares to raise interest rates. Analysts including JPMorgan Chase & Co’s Cusson Leung and Morgan Stanley’s Praveen K Choudhary are calling for Hong Kong property prices to slide as much as 10 per cent next year.

STOCK VALUATIONS

A 20 per cent plunge by the property-stock gauge from its June peak dragged valuations to the lowest level relative to the benchmark Hang Seng Index since 2001. The measure of 10 developers trades at 5.9 times reported earnings, compared with the 10.8 multiple on a Bloomberg gauge of global real estate shares.

The Hang Seng Properties index slumped 3.4 per cent to a three-week low at 10.53am in Hong Kong.

The city’s retail sales fell 2.8 per cent in July from a year earlier, and shop rents are declining. UBS Group AG lowered its target for Hong Kong’s benchmark stock gauge by 25 per cent this month, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline. Sun Hung Kai Properties, the city’s biggest developer by market value, is down 17 per cent in 2015.

The Hong Kong Monetary Authority said in a report Friday the risk of a “downward adjustment” in home prices is increasing amid volatility in global and domestic financial markets.

“It’s bad timing with an interest rate hike coming in the US and slowing GDP in Hong Kong,” Mr Lau said. “All these things put together in a nut shell and I don’t see any strength in the market.” BLOOMBERG

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