There is no quick recovery from Hong Kong’s property slump

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Hong Kong’s own succession drama is unfolding at a pivotal moment for the city’s property sector. Shares of New World Development, the developer owned by the billionaire Cheng family, were suspended from trading on Thursday amid reports it was considering replacing 44-year old heir Adrian Cheng as chief executive.

The stock was halted pending the release of inside information. Trading in its subsidiary, New World Department Store China, the holding company for department store chains in mainland China and where Cheng is chair, was also suspended.

The more immediate concern for investors is New World’s expected loss of HK$20bn ($2.6bn) for the financial year to June. Falling sales, impairment charges and investment losses have pushed the group to its first annual loss in two decades. Its shares are down 43 per cent in the past year, significantly underperforming sector peers and partly reflecting weakness in Hong Kong’s property market.

The real estate slump from late 2021 has worsened this year with prices of pre-owned homes falling to the lowest level in nearly eight years in June. Higher interest rates have depressed demand for Hong Kong’s commercial and residential property. Meanwhile, the renminbi’s depreciation against the dollar has made purchases of Hong Kong property more expensive for mainland Chinese buyers, who account for almost three-quarters of the city’s high-end home sales.

But not all of the blame for New World’s underperformance is down to broader weakness in the sector. Its total debt to equity stands at more than 70 per cent, more than triple that of local rival Sun Hung Kai Properties. Its operating margins have nearly halved over the past six years to 10 per cent at the end of last year, less than a third of local peers. Shares now trade at just 0.1 times book value.

Since last week, following Hong Kong’s long-awaited half-percentage point interest rate cut to 5.25 per cent, investors in the city’s developers have been watching property transaction figures closely for signs of a turnaround in sentiment.

Yet the number of new house sales have only fallen further since. Even when signs of a recovery start to emerge, clearing the stock of unsold residential units — which already hit a two-decade high last year — will be the bigger challenge. With or without a change at the top of New World, hopes for a quick recovery look sorely misplaced.

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