Tougher loan limits for homebuilders

Hong Kong’s property developers will face tougher restrictions on bank loans under soon-to-be-introduced new measures to ‘enhance risk management measures on banks.’

From 1 June, all banks will be required to lower their caps on construction financing to developers, according to a 12 May circular by the Hong Kong Monetary Authority (HKMA).

The new maximum limit for developers to buy land will be cut to 40 percent of the site’s value, down from 50 percent currently. The cap on loans for construction costs will come down to 80 percent from the current 100 percent. And the overall bank financing cap for the whole project will be reduced from 60 to 50 percent of the expected value of the completed properties.

This is due to the HKMA’s concerns about the risks that the city’s banks are exposed to when lending large amounts to homebuilders, some of whom have been funding their land purchases entirely through borrowings.

Analysts said the move will increase overall development costs and be a big blow to those who rely heavily on financing for their projects, as reported in the South China Morning Post. 

By cutting the amount of financing, the HKMA hopes developers will be discouraged from offering overly generous mortgages to buyers.

Based on data collected by the HKMA, some developers were found to be offering home loans of between 90 and 120 percent of the value of the properties sold. This high loan-to-value ratios exceeds the more prudent 70 percent cap for banks’ mortgage loans.

These developers had offered a total of HKD27.6 billion worth of mortgage loans as of the end of 2016, up 189 percent from HKD10.7 billion at the end of 2015. With the growing amount of developer loans, banks have to be more careful about their risk exposure to housing developers.

In addition, with effect from 1 August, the HKMA will require banks to add 50 percent more capital weighting on developers who offer total mortgage loans at an amount equal to more than five per cent of their book value.

For developers offering mortgages valued at equal to or more than 10 percent of their book value, or if they refuse to provide the relevant information, banks would need to double the capital amount to back up the loans to these developers.

According to Colliers International, buyers will have to rely more on own resources for the down payment as the new measures will limit developers’ ability to offer high loan-to-value ratio mortgage plans. This may also result in even smaller-sized units with lower lump sum values. — Construction+ Online