Among those looking forward to the Federal Reserve’s interest rate cuts, few are as anxious as Hong Kong’s property tycoons who are now dealing with sluggish home sales, empty office buildings and mutinous tenants demanding lease renegotiations.
About 60% of listed property companies’ debt is borrowed at floating rates. Banks charge New World Development an average 1.1% to 1.2% over Hibor, whose movements track the fed fund rate because of the Hong Kong dollar peg. A 1 percentage-point rate cut can save Chief Executive Officer Adrian Cheng, a third-generation heir from a tycoon family, 1.1 billion Hong Kong dollars ($141 million) and improve earnings by a third, according to Morgan Stanley estimates. New World, one of Hong Kong’s most indebted developers, paid HK$2.5 billion in financing costs in the second-half of 2023, eroding 44% of the firm’s operating profit.
But more importantly, the Fed’s easing cycle can start to help big landlords make an investment case for the assets they try to sell or use as collateral for bank loans. Currently, the city’s entire real estate market — from residential to retail to offices — suffers from negative carry, in that the rent an owner can expect to collect is nowhere close to paying for financing costs. Leasing out Grade-A offices, for instance, yields on average only about 3.2%, not enough to cover the one-month Hibor’s 3.9%.
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