Asia Perspectives - Volatility in funding cost in Hong Kong and its implications for the property sector

Highlights: The 1-month Hong Kong interbank offered rate (HIBOR) has declined from 4.0 per cent at the end of April to 0.96 per cent as of 20 May, hitting a 3-year low. In our view, the path for HIBOR will be dependent on the monetary authorities’ debt issuance, corporate dividend payment seasonality, the USDHKD carry trades and equity-related fund flows. If HIBOR remains low, investment sentiment in the Hong Kong residential housing market could continue to improve, with the resumption of positive carry from owning an apartment.

• In the past two weeks, the Hong Kong interbank rates fell as the strong-side convertibility undertaking of HKD7.75 to USD1 under Hong Kong’s Linked Exchange Rate System was triggered earlier this month due to equity inflows and spillover effects from appreciation pressures in other regional currencies, resulting in the HKMA selling HKD and buying USD, and more than tripling the Aggregate Balance in the process
• We think the flush in HKD liquidity and the drop in HIBOR will tend to be temporary. In our view, the path for HIBOR will be dependent on the monetary authorities’ debt issuance, corporate dividend payment seasonality, the USDHKD carry trades and equity-related fund flows. We also note that HKD has weakened back to near 7.83 level against USD as of 20 May, closer to the weak-side of the convertibility undertaking, which, if triggered, will reduce the interbank liquidity
• If HIBOR remains low, we see effective mortgage interest rates in general trending down in the coming months, which would provide some support to investment sentiment in the Hong Kong residential housing market, with the resumption of positive carry (i.e. rental yield being higher than effective mortgage rates). With residential rental yield rising steadily to above 3.5 per cent, some end users could shift away from leasing properties to owning properties, in our view, given the benefit the positive and more attractive carry in the near term. A lower HIBOR should also alleviate the near-term financing expenses of Hong Kong property companies. We estimate that if there is a 100bp decline in borrowing costs for the full year, their earnings could improve by 4.6 per cent on average