Desperate Hong Kong developers tweak primary mortgage offers

But are they a problem?

It has been asked whether or not high LTV mortgages pose a problem.

According to a research note from Barclays, over the past few months, some Hong Kong developers have started to offer primary mortgages with a loan-to-value ratio (LTV) of between 80% and 90%.

As many of these are offered by the developers’ own financing subsidiaries, they fall outside the Hong Kong Monetary Authority’s usual LTV and debt-servicing requirements (DSR).

Here's more from Barclays:

To judge whether these present risks to the developers, we have looked into the balance sheet of the seven Hong Kong developers under our coverage.

As at June 2015, the total mortgage receivables on their balance sheets was only HK$8.3bn. In the context of their asset and equity bases,
the mortgage exposures are only 0.38% and 0.56%, respectively.

Given how conservatively the Hong Kong developers have traditionally managed their balance sheets, we believe they are unlikely to grow these exposures materially. That said, while the current exposures are small, we believe this is an area worth monitoring to see how this issue evolves.

Not a problem yet but good idea to monitor how this develops: In conclusion, while we can appreciate the potential risks carried by high-LTV mortgages, as they only make up 0.56% of the property companies’ equity at this point, we do not believe they are a problem yet.

Furthermore, given how conservatively the Hong Kong developers have traditionally managed their balance sheets (the current net-debt-to-equity ratio is at 11.9%), we believe they will be careful not to build up too big of an exposure. That said, given the popularity of these high-LTV mortgages, we will be checking back to see how mortgage receivables evolve going forward.