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New home sales continue to decline despite interest rate cuts.
At a pivotal moment for Hong Kong’s real estate sector, the “heir” drama is unfolding for the city. On Thursday, trading in shares of New World Development, the real estate development company owned by the billionaire Cheng family, was suspended before it was announced that heir Adrian Cheng would step down from the position of CEO of the group founded by his grandfather. Cheng will now move to the position of non-executive vice chairman, and will be replaced by the group’s chief operating officer, who is from outside the family.
The immediate concern for investors currently is the accumulated losses and the unstable financial situation of the group. New World announced that its subsidiary, New World Department Store China, a holding company that owns major supermarket chains in China, recorded a net loss of 17.1 billion Hong Kong dollars (2.2 billion US dollars) for the fiscal year ending in June.
Lower sales, asset impairment charges and investment losses contributed to the group’s first annual loss in two decades. Its shares fell by 43% over the past year, which led to a significant decline in the performance of its shares compared to its peers in the sector, which represents a performance significantly lower than the performance of its peers in the sector and partly reflects the weakness of the real estate market in Hong Kong.
The real estate recession began in late 2021, and worsened during the current year. Prices of pre-owned homes fell to their lowest level in about 8 years in June. The rise in interest rates led to a decline in demand for commercial and residential properties in Hong Kong. At the same time, the decline in the value of the renminbi against the dollar has made purchasing property in Hong Kong more expensive for mainland Chinese buyers, who account for nearly three-quarters of luxury home sales in the city.
However, New World’s poor performance cannot be entirely blamed on the widespread decline in the sector. The company’s total debt to shareholders’ equity exceeds 70%, which is more than three times the debt of its local competitor, Sun Hang Kai. Operating margins also fell by almost half over the past six years to 10% by the end of last year, which is less than a third compared to the margins of its local competitors. Its shares are now trading at just 0.1 times book value.
Since last week, following Hong Kong’s long-awaited interest rate cut by half a point to 5.25%, investors in the city’s property developers have been closely monitoring property deal data for signs of a shift in sentiment.
However, the number of new home sales has declined further since then. Even when signs of recovery begin to emerge, clearing unsold housing inventory, which already reached a two-decade high last year, will be the biggest challenge. Even with a change at the helm of New World, hopes for a quick recovery seem misplaced.
