FOCUS: Swire Pacific provisions reflect high costs rather than weak outlook

HONG KONG (AFX-ASIA) - Swire Pacific Ltd's 1.7 bln hkd provision for its joint stake in the Ocean Shores development project reflects the high price paid for land involved rather than a bearish outlook for residential property prices as a whole, analysts said. In addition, the provision, booked in the company's 2000 results, factors in expectations that prices in Tseung Kwan O district, where the Ocean Shores project is located, will recover more slowly than the average for Hong Kong, they said. Analysts are looking for a mild recovery in the local property market. They see prices rising by an average of up to 5 pct through to end-2001, with the U.S. economic slowdown expected to keep a lid on consumption in Hong Kong and offset to some extent the impact of lower interest rates. WorldSec Securities property analyst Alice Leung said one should not generalise Swire Pacific's provisioning and expect other developers to make similar provisions. "That is not fair. Ocean Shores is an isolated case. There is an oversupply situation in that area and recovery in these areas tend to be much slower than the market in general." Dao Heng Securities' Eric Yuen agreed, saying that a number of new projects are expected to be launched in the Tseung Kwan O area soon. He feels Swire has been conservative in provisioning to the extent it has. "After the provisions, the all-in-cost of the project would be around 3,000 hkd per square foot, which would be sufficient. No more provisions would be needed," he said. "We can say Swire Pacific is conservative but we can't say they are taking a bearish view of the property market," he said. Yuen said the company took into account a drop in secondary property market sales last year and the level of prices at the end of 2000. "The provision is in reaction to the performance of the residential market last year. It is not an outlook for this year." Yuen, who is forecasting a net profit of 6.4 bln hkd for Swire Pacific in 2001, said he expects property prices to rise by around 5 pct through to year-end, with the bulk of these gains falling in the second half. "We are assuming interest rates will see another 75 basis point cut from now on, which means that mortgage rates could go down as low as 5.5 pct. That will be lower than the residential yield of around 5.7 pct for the market," he said. Leung of WorldSec Securities is also looking for a mild recovery, noting that the market share of private developers has increased following the government's move to cut its Home Ownership Scheme production and land sales programme this year. HSBC Securities property analyst Derek Cheung said he sees the property market remaining flat this year, supported by expected economic growth and government efforts to prevent any further deterioration of property prices. "After doing something (earlier this year), sentiment improved. The government has not done anything further. It is only likely to intervene again if sentiment deteriorates further," he said. Cheung said Swire Pacific's booked costs for the Ocean Shores project were very high at about 3,700-3,800 hkd per square foot. He noted that Swire includes interest expenses in its booked costs, in contrast to the practice of Swire's partner in Ocean Shores, Sun Hung Kai Properties Ltd. Sun Hung Kai Properties made a provision of 4.7 bln hkd for Ocean Shores and another project in 1998 results and is not expected to have to make further provisions, analysts sai. Goldman Sachs analyst Chuk Kwan Ting said Swire's provisioning for Ocean Shores served as a reminder that there are a lot of projects still to be sold on sites bought before the Asian financial crisis.

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