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1. New home measures lift stocks

2. Sales halt blow to coffers: Leung

3. Projects freeze casts shadow on rail firm

4. Shareholders could seek compensation

5. Worries grow over the future of housing body

1. New home measures lift stocks
Jonathan Tam and Karen Chan, The Standard 15 November 2002

Shares of major real estate developers rose yesterday after the government unveiled measures to support flat prices.

The Hang Seng properties sub-index, which tracks major property stocks, surged 2.68 per cent, outpacing the benchmark index which rose 1.29 per cent. Major developers Cheung Kong (Holdings), Sun Hung Kai Properties and Henderson Land Development all gained.

“[The government] has sent out a positive signal that could bolster sentiment,'' Goldman Sachs analyst Ting Chuk-kwan said.

The government said on Wednesday it would freeze land sales until the end of next year and stop selling sponsored private and public flats, among other measures, to stabilise the sluggish property market.

The government is ``penalising developers with small land banks and lack of farmland'', DBS Vickers Securities analyst Sylvia Wong said.

Wong said the move would affect developers who were relying solely on external sources for land as they would not be able to take advantage of the weak market to replenish land reserves cheaply.

But farmland owners could, in theory, lock in low land premiums through conversion.

“We would expect the major beneficiaries from these policies to be SHKP and Henderson and the operations of Cheung Kong,'' SG Securities analyst Andrew Taylor said.

“The smaller developers such as Sino Land and HKR (International) will find rebuilding market share more difficult under these conditions.''

Property prices have fallen 60 per cent from their pre-1997 peak as a result of the Asia financial crisis, crimping profits of all developers. Although the economy rebounded briefly in 2000, and continues to improve, prices remain subdued due to a lack of consumer confidence and oversupply.

Goldman Sachs, which has a neutral rating on the sector, has revised its forecast on price decline next year to 5 per cent from 8 per cent.

Prices were likely to fall another 3 per cent in the following year, it said.

Analysts said more than 60,000 private flats could be available for sale in the next 24 months and the oversupply situation was likely to continue until the end of 2004. “We do not believe the set of measures announced will have much effect in halting the decline in housing prices,'' said Salomon Smith Barney analyst Robert Fong, who rates the sector ``underweight''.

Fong sees the fall in property prices as a necessary, albeit painful, adjustment to Hong Kong's cost structures in the absence of a flexible monetary policy. He did not expect the latest measures to halt or reverse the downward trend.

Meanwhile, Cheung Kong said it would release four more apartments at its luxury residential Victoria Towers project for sale tomorrow, priced at more than HK$4,563 per square feet.
Wharf (Holdings) said it would offer a new payment method for its Sorrento Phase II to boost sales, while HKR plans to sell its Coastal Skyline flats soon.
Real Estate Developers Association president Stanley Ho said property prices could rise by 5 to 10 per cent.

2. Sales halt blow to coffers: Leung
Sebastian Tong and Jonathan Tam, The Standard 15 November 2002

Financial Secretary Antony Leung admits the government's coffers will suffer in the short term from the suspension of land sales.

But he said the shortfall could be offset by an improvement in government property-related revenues as the market stabilised, helping to achieve a balanced budget by fiscal year 2006 to 2007.

“In the near term, particularly in the coming year, revenue from the sale of land will obviously be affected,'' Leung said at the opening of the 2002 Asian Venture Forum yesterday.

The suspension of land sales until the end of 2003 is a key plank of nine measures announced by the government on Wednesday to stabilise property prices, which have plunged by 60 per cent in the past five years.

They also include the scrapping of sales of public and government-sponsored flats.

However, the government faces a potential shortfall of HK$17 billion in its budget forecast for fiscal 2002-2003, as it had planned on reaping HK$25 billion from land sales, against receipts so far of only HK$8 billion.

“I don't think Leung will regain this [revenue],'' Fortis Bank economist Koen Rademaekers said. ``Furthermore, I don't think that land prices and the housing market as a whole will increase, maybe they will become a bit more stable but they will just continue their decline for some time.''

Economists said this year's deficit could easily top last year's record of HK$63.3 billion, as the sale of HK$15 billion MTR Corporation shares had not occurred and savings from civil service pay cuts were less than forecast. The government predicts a deficit of HK$45.2 billion for the current fiscal year.

“It's difficult to tell how effective those [property] measures are, if they work as hoped then the government can indeed earn more from profit tax and stamp duty,'' Merrill Lynch economist Marvin Wong said.

“But it's doubtful whether these effects will be reflected in the market in a short period of time.''

The swelling deficit is putting pressure on the government's credit ratings and the currency peg as the government needs to use fiscal reserves to cover the deficit.

Deficit worries may also prompt the government to boost revenue by other means such as taxes.

In March, Leung budgeted for anual revenue from land premiums of 2 per cent of the gross domestic product for the next fiscal year, which means the government will record a shortfall of HK$26 million in 2003-04 as land auctions are halted. The one-year Hong Kong dollar forward edged up yesterday from 278-288 points to 300-310 points at market close on concerns over the worsening deficit, traders said.

“If the property sector is healthier, the receipts from both land sales as well as from the secondary market will be improved from the stamp tax and profit tax,'' Leung said.

“In the medium term, this would help our efforts to achieve the target of a budget balance by 2006-2007.''

Leung said that as the government still had a large fiscal reserves it did not have to impose measures to cover short-term capital needs adding that the government was studying ways to balance the budget.

3. Projects freeze casts shadow on rail firm
Karen Chan, The Standard 15 November 2002

The government's suspension of residential property tenders by the MTR Corporation and the Kowloon-Canton Railway Corporation raises serious questions about the MTRC's degree of operating autonomy, analysts say.

The move could hurt the MTRC's property funding model for line developments, in addition to effecting the earnings per share or net asset value estimates, they said.

As part of its measures to stabilise Hong Kong's ailing property market, the government on Wednesday announced a freeze on MTRC and KCRC property project tendering until the end of 2003.

Sun Hung Kai Securities analyst Eva Cheng said the MTRC would lose under the ruling as its property development income would be jeopardised.

“The profit-generating ability of the only listed local railway operator will be further jeopardised,'' she said. ``Booking of deferred income from the Airport Railway property projects, the major earnings source, is going to end soon and it has only launched a few Tseung Kwan O Line development packages and one small project in Choi Hung so far, after the Airport Railway projects.''

Cheng said unless there was positive progress on its proposed merger with KCRC, she could not see any promising prospects for the MTRC.

Salomon Smith Barney analyst Robert Fong said that as a public company with minority shareholders, it was incumbent upon the MTRC's board and management to make decisions based on commercial principles and in the best interests of all its shareholders.

The government's move could raise questions about the commercial autonomy of government-linked companies.

Also, “The tender schedule for sites along the Tseung Kwan O Extension is already behind original schedule due to bad market conditions,'' he said.

Credit Suisse First Boston analyst Geoffrey Palmer said: ``Regulatory risk is one of the over-riding factors that leads us to dislike the fundamentals of MTRC. We believe that the government has unnecessarily increased this risk and, unfortunately, there is little that management can do to reduce it.''

The subway operator's property funding model is also in doubt.

The MTRC has relied extensively on a property-funding model for railway development as it was granted development rights atop railway stations. The rail company would then put these projects up for tender to private developers.

When market conditions were buoyant, developers would bid aggressively for the right to develop railway projects as they were seen to be more marketable and likely to command a pricing premium.

The MTRC would be able to benefit from any upside in the projects through either upfront payments from the developers, or back-end profit share.

For the Airport Express and Tung Chung Lines, the MTRC received about HK$22 billion in upfront payments alone from property developers.

Salomon's Fong said he expected to see reduced use of the property-funding model in future.

Government policy seemed to be tending towards centralising control of land supply in the hands of the executive branch. And the overall state of the property market put the viability of such a model in question, he said.

MTRC shares closed up 0.559 per cent at HK$9 yesterday.

4. Shareholders could seek compensation
Anthony Tran, The Standard 15 November 2002

Minority shareholders of the MTR Corporation could seek compensation if they believe the government's suspension of property development tenders is detrimental to the company's profit, the Hong Kong Society of Accountants says.

The government on Wednesday froze property development tenders by MTR Corp and the Kowloon-Canton Railway Corporation (KCRC) - one of a series of measures to revive the ailing property market.

However, an MTRC spokesman said yesterday: ``The management of MTRC had decided to suspend the tenders before the government announced new housing policies to stabilise the property market.

“This is for the sake of our profitability, given the lacklustre property market,'' he said. MTRC did not say what effect suspending tenders would have on earnings.

For the six months ended June 2002, property development represented 39 per cent of MTRC's HK$3.368 billion operating profit before depreciation.

HKSA president Alvin Wong said there was ``a measure'' of conflict of interest, given that the government was the policymaker and controlling shareholder of MTRC.

Wong said minority shareholders should ask for compensation, based on the Companies Ordinance, if they thought the property revival measures were hurting MTRC's profitability.

Investors' advocate David Webb said: ``Clearly the interests of MTRC may not coincide with the interests of its controlling shareholder. I think the board owes an explanation to shareholders as to why they agreed to this.''

Webb said: “It could be argued that the MTR may benefit from higher property prices when they resume sales, but personally I doubt that this is in the overall interests of MTR, otherwise why didn't they do this before?

“Unfortunately, when the MTR was floated, the government got a blanket waiver of the Listing Rules on connected transactions for all property deals with the MTRC, and the government can also elect the so-called independent directors, so minority shareholders have no input. It sets a bad example for corporate governance.''

5. Worries grow over the future of housing body
NG KANG-CHUNG, SCMP 15 November 2002

Concern over the future of the Housing Authority grew yesterday in the wake of the scrapping of the Home Ownership scheme, with one pressure group warning it could go bankrupt within three years without financial help from the government.

Halting the authority's profit-making scheme, which began in 1978, was one of nine measures announced by the government on Wednesday in a bid to boost the property market.

The scheme, which enables people to buy subsidised flats, will end from next year. Flats under construction will be completed.

The authority's home ownership committee chairman, Walter Chan Kar-lok, yesterday argued the scheme was a victim rather than a cause of the sluggish market, as some developers said.

But he agreed it was reasonable to stop the scheme if demand had dropped.

The latest sale of 2,451 flats attracted only 5,117 applicants - the lowest number in 24 years.

"Sale of home ownership scheme flats account for about 60 per cent of the authority's income. Scrapping this source means we would face financial difficulties in two to three years," Mr Chan said. "We need to work out a new financial deal with the government."

Under the present arrangement, struck in 1994, the authority must repay by 2008 the $12.8 billion it received from the government when it become financially independent in 1988.

It also has to share with the administration its profits from commercial rentals.

According to the authority, surplus from its home ownership account dropped from $11.35 billion in 1996-97 to $9.14 billion in 1999-2000.

This was estimated to drop further to $3.36 billion in 2002-03, mainly because of a previous sales ban to boost the market.

Set up in 1973, the authority is a statutory body overseeing public housing policies. At present, about half of the population live in authority estates.

Permanent Secretary for Housing, Planning and Lands Leung Chin-man yesterday conceded some residents might find it difficult to afford private flats without the Home Ownership Scheme.

A spokesman for the Hong Kong People's Council on Housing said the scrapping of the scheme was "to sentence the authority to death".

"Much of [the authority's] funds come from commercial rentals and flat sales," he said.

"Without the income, the authority can only rely on its reserves, standing at about $30 billion, which can be used up in about three years."

The spokesman warned the authority could go bankrupt if officials refused to inject money.

A spokeswoman for the Housing, Planning and Lands Bureau said yesterday the government would give the authority necessary support if it faced financial problems.

Secretary for Housing, Planning and Lands Michael Suen Ming-yeung announced on Wednesday a package to shore up the property market.

Major measures include stopping land sales, cancelling the sale of public rental units and relaxing tenancy laws.

The convenor of the Alliance of Housing Department Staff Unions, Mok King-po, said yesterday staff were worried about mass layoffs after the scheme was dismantled.

A government review in June called for the authority to eventually be turned into an advisory body on both private and public housing.