Here are 3 possible threats to Hong Kong's property sector

Don't neglect these signs, warns analyst.

According to Nomura, ever since its November 2012 Anchor Report, “Walking a tightrope”, it has been of the view that home prices should stall in 2013 and 2014. Although home prices had raced head 5.1% so far this year, it continues to believe that this 5.1% will have to be given back during the rest of 2013.

Nomura adds, based on anecdotal investor feedback, its cautious view remain very much in the minority, with most expecting home prices to remain firm as long as US interest rates remains low. With the HS Property Index having risen 38% in 2012 (Vs. HS Index +23%), it believes the market has become overly complacent and have ignore key warning signs especially in the midst of a very busy reporting season. 

"Just in this past week alone, we have seen the following:  (1) Cheung Kong cutting prices at One West Kowloon by 11%, (2) HK banks flagging that due to higher risk weighting, they are now considering a 20-25bp hike for new mortgages, and (3) Developers cutting contract sales targets."

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Nine months ago when property stocks were very out of favour, these signals would have been greeted very negatively.

But yet, with the HS Property Index now up a further 29% since end-June 2012 (Vs. HS Index +17%), they are ignored or “discounted”. In our view, these are all significant new developments.

We reiterate our cautious view on the local property market and our preference for those property stocks with organic growth outside of HK or very depressed valuations. Our preferred names include CK, HLD and HLP.  

Signal #1: Cheung Kong cutting prices at One West Kowloon by 11%
With developers regularly employing various marketing gimmicks to drum up demand, reports of price cuts need to be interpreted carefully.

What makes Cheung Kong’s latest price cut special is that the 11% price cut is not just coming against a pre-launch indicative price but against a previous announced price list. Of the 20 units that Cheung Kong offered at One West Kowloon yesterday, 16 had been previously offered back in November 2012.

Net of various incentives (such as the “Happy Great Discount” of 10% and “Stamp Duty Subsidy” of 3.75%), the latest effective price is 11% lower compared to the previous price list. 

Signal #2: HK banks considering a 20-25bp hike in mortgage rates
According to the SCMP (March 8, 2013), HSBC and Standard Chartered have both flagged that with the HK Monetary Authority raising the risk weighting of new mortgages from 10% to 15%, the costs of mortgages to banks will increase by 20-25bp. In the long run, this increase will be reflected in higher interest rates to borrowers.

Signal #3: Developers cutting contract sales targets
Over the past two weeks, citing the impact from the recent policy measures, various developers have cut their contract sales targets. NWD had reduced its 2013 HK contract sales from HKD14-15bn to HKD12-13bn.

SHKP had reduced its FY13 contract sales from HKD35bn to HKD32bn with the HK portion being reduced from HKD28bn to HKD22.2bn. Although some have argued that, even with the cuts, some developers are still enjoying some y-y growth, we believe the bigger directional picture is being lost.

Sales targets are being reduced and even in those cases where sales targets are being maintained, this is coming at the costs of lower prices and reduced margins.