One-fifth HK developers earned less than interest costs, IMF says.

About one-fifth of Hong Kong developers were not able to generate sufficient earnings to cover interest expenses in 2023 as higher funding costs and weak earnings reduced their debt-servicing capacity, the International Monetary Fund said. 

The share of firms with structurally weak debt-servicing capacity has also crept up to 10.7 percent, the IMF said in a report published on Thursday.

Local real estate firms’ return on assets declined notably to 1 percent in 2023 from 6 percent in 2018, reflecting the impact of the pandemic and the ongoing property market adjustment, the report said, adding that about 23.5 percent of them were loss-making in 2023, a sharp increase from 1.8 percent in 2018. 

Regarding liquidity risk, the IMF said more developers have become exposed to refinancing risk as 38 percent of them in terms of assets exhibited a negative estimated cash position, mainly driven by a decline in cash holding and an increase in short-term debt. 

The leverage of local developers could increase by 5 percentage points to 39 percent if inventory valuation falls by 10 percent and commercial property prices drop by 20 percent, the IMF warned. 

Under the same scenario, the share of debt belonging to firms with negative equity would increase but remain low at 2.1 percent, the report said.