Bank curbs are forcing buyers to tap non-bank lenders as prices rise
Hong Kong's mortgage lenders do booming business in the shadows
When Horan Fu decided to buy a 500 square feet apartment for HK$7.4 million (Dh3.47m) last year, the biggest draw was the developer's offer of 85 per cent financing with an option to defer interest payments for the first three years.
"The interest rate could be a lot higher after three years, but there's also a chance that the interest would still be cheap because finance companies are competing fiercely," says Mr Fu, who works in Hong Kong's financial services industry.
"There's risk but there's also an upside. It's a good investment opportunity."
With traditional financing drying up in Hong Kong at a time when property prices are at a record high, home buyers such as Mr Fu are looking to non-bank lenders, many of them the financing arms of developers, to get in on the boom.
Under Hong Kong law, these "shadow banks" can loan legally as long as interest rates do not exceed 60 per cent per annum, according to industry officials.
The system is a lifesaver for those who have found it harder to secure loans, particularly mortgages, because of curbs imposed by the central bank to dampen home prices, which are up 137 per cent since the start of the financial crisis in 2008.
But it also puts the broader system at risk if property prices turn around or borrowers start to default, because many of these lenders have themselves raised financing by borrowing from big banks or selling bonds.
Because they are not banks – they do not take deposits – shadow lenders in Hong Kong are monitored by the police, not financial regulators.
The manager of one such lender says his firm, founded by a mainland Chinese entrepreneur, lends on average HK$8m to HK$10m for a first mortgage and up to HK$300m for a villa, with downpayments much smaller than a regular bank.
"I can lend you 90 per cent for a property, for example, no problem," he says from his office in the central business district, requesting anonymity.
The share of shadow banks in Hong Kong's mortgage business is still small – in the low single digits – but industry officials say it is growing fast, up at least 30 to 40 per cent a year over the last couple of years.
That is no surprise given that mainstream lenders such as HSBC and Standard Chartered have capped mortgages at just 51 per cent at the end of last year, according to Standard & Poor's.
That was after the Hong Kong Monetary Authority (HKMA) gradually lowered the property financing ratio, raised interest rates, hiked the risk capital buffer for new loans and discouraged banks from making large loans to developers with big mortgage lending operations.
"Regulators have got us to this situation," says Richard Wong, a professor at Hong Kong University's school of economics and finance. "The money lenders are not deposit-taking companies ... but that doesn't mean there is no risk because the [property] market could correct."
While non-bank financing companies play a major role in mortgage lending in many developed economies, regulators have been tightening the scrutiny of these lenders, especially after the sub-prime mortgage crisis in the United States.
The HKMA says it has given guidance to banks to ensure they boost their "credit risk management" when it comes lending to property developers.
"The HKMA will continue to monitor the property and mortgage markets closely and will introduce appropriate measures to safeguard the stability of the banking system as necessary," it says.
In addition to the financing units of developers, another 1,800 entities have a licence to operate in Hong Kong as money lenders, the bulk of them in mortgages – double the number five years ago, according to the official Companies Registry data.
Another 100 firms had applied for a money lender's licence as of end-May this year, according to a review of data at the Hong Kong Companies Registry.
Mortgage loans granted by the dozen or so financing units of Sino-Land Company more than doubled in 2016 from the year before to HK$1.02 billion, according to its annual report, in a year when turnover nearly halved and profit dived by almost 25 per cent.
Other top developers, including Cheung Kong Property Holdings – controlled by Hong Kong's richest man Li Ka-shing. Sun Hung Kai Properties and Henderson Land Development also have financing units.
Loans from one of Sun Hung Kai financing arms for its latest development in the New Territories started at 80 per cent of the property price and rose to 120 per cent for people who already had a home and wanted to upgrade, according to its price list.
About 5,000 people applied to buy the 234 units put on sale on July 1 in the first phase of the development, where a 721 sq ft unit costs as much as HK$10m.
Interest rates from shadow lenders vary widely but typically start at about 5 per cent and rise to 20 per cent or higher, versus 2 to 3 per cent at regular banks, which also lend for longer terms of 25 to 30 years, industry sources say.
Sun Hung Kai says it was always "prudent".
"While the package helps our buyers, it does not affect the company's financial position as the loan exposure is very small and well secured."
Sino-Land, Cheung Kong and Henderson did not respond to requests for comment.
The Hong Kong police force, the de facto regulator, says it does not have any data on buyer complaints against non-bank financing companies but adds that it maintained a "close liaison" with the financial industry.
"Enforcement action will be taken by the police if there is evidence implicating any money lender engaged in illegal practices," it says.
Some bankers and analysts say the growth of shadow banking in the mortgage sector could be a ticking time bomb, especially if there is a correction in the market, as widely expected.
The potential for defaults is also a concern, although the delinquency ratio in the main banking sector at least remains low at just 0.03 per cent in May, unchanged from April, according to the HKMA's latest available data.
The brokerage Nomura expects prices to peak in the first half of this year, and said that local economic fundamentals do not support further price rises.
"[The property market] is very expensive ... it goes up very fast, [but] it actually corrects also very fast," says David Chiu, the chair of the estate agent Far East Consortium International .