When Horan Fu decided to buy a 500 square foot apartment for HK$7.4 million (US$950,000) last year, the biggest draw was the developer’s offer of 85% 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,” said 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 like 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 annum, according to industry officials and an official document seen by Reuters.
The system is a life-saver for those who have found it harder to secure loans, particularly mortgages, due to curbs imposed by the central bank to dampen home prices, which are up 137% 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, and not financial regulators.
The manager of one such lender said his firm, founded by a mainland Chinese entrepreneur, lends on average HK$8 million to HK$10 million for a first mortgage and up to HK$300 million for a villa. Down payments are much smaller than those demanded by regular banks.
“I can lend you 90% for a property, for example, no problem,” he told Reuters from his office in Hong Kong’s Central business district, asking not to be named because he was not authorized to speak to the media.
“The money lenders are not deposit-taking companies … but that doesn’t mean there is no risk because the (property) market could correct”
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% a year over the last couple of years.
That’s no surprise given that mainstream lenders like HSBC and Standard Chartered have capped mortgages at just 51% 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,” said Richard Wong, a professor in the University of Hong Kong’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 their scrutiny of these lenders, especially after the sub-prime mortgage crisis in the United States.
The Hong Kong regulator, the HKMA, told Reuters it had 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 said in a statement.
In addition to the financing units of developers, another 1,800 entities have licenses to operate in Hong Kong as money lenders, the bulk of them in mortgages. That’s double the number five years ago, according to the official Companies Registry data.
Another 100 firms had applied for a money lender’s license 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 Ltd 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 nearly 25%.
Other top developers, including Cheung Kong Property Holdings Ltd , controlled by Hong Kong’s richest man Li Ka-shing, Sun Hung Kai Properties Ltd and Henderson Land Development Co Ltd also have financing units.
“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”
Loans from one of Sun Hung Kai’s financing arms for its latest development in the New Territories started at 80% of the property price and went up to 120% 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-feet unit costs as much as HK$10 million.
Interest rates from shadow lenders vary widely, but typically start at around 5% and go up to 20% or higher, versus 2-3% at regular banks, which also lend for longer terms of 25-30 years, industry sources said.
Sun Hung Kai told Reuters 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, the de-facto regulator, said it did not have any data on buyer complaints against non-bank financing companies, but added 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 said in a statement.
“The property market is very expensive … it goes up very fast, but it actually corrects also very fast”
Some bankers and analysts say the growth of shadow banking in the mortgage sector could be a ticking time bomb, especially if there’s a correction in the market, as is widely expected.
The potential for defaults was also a concern although the delinquency ratio in the main banking sector, at least, remains low at just 0.03% in May, unchanged from April, according to the HKMA’s latest available data.
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,” said David Chiu, chair of realtor Far East Consortium International.