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Hong=20 Kong Smog Prompts Merrill to Cut Office Ratings (Update1)=20

By Ken Sweet

Nov. 21 (Bloomberg) -- Hong Kong's air pollution led = Merrill=20 Lynch & Co. to cut share ratings of three office = property=20 companies in the city on concern professionals will leave to = escape=20 the smog.

It's the first time the broker has downgraded companies = because=20 of the city's pollution, analyst Spencer White said in a = phone=20 interview today. Investors should instead buy the shares of = three=20 Singapore developers and landlords, White said in a report. =

``It's a very strong unprecedented message,'' Andrew = Thomson,=20 chief executive of the city's Business Environment Council, = said by=20 phone. The report indicates a ``new level'' of concern among = businesses, Thomson said.

Merrill Lynch cut the ratings of Hongkong Land Holdings = Ltd.,=20 Hysan Development Co., and Great Eagle Holdings Ltd., while=20 recommending three Singapore companies: City Developments = Ltd.,=20 CapitaLand Ltd. and Suntec REIT. Workers leaving Hong Kong = because=20 of pollution may worsen a decline in demand for office = space,=20 White's report said.

Hysan Development fell 60 cents, or 2.9 percent, to = HK$20.05 at=20 the 4 p.m. close in Hong Kong. Great Eagle Holdings gained = 20 cents,=20 or 0.9 percent, to HK$23.40. Hongkong Land, which is listed = in=20 Singapore, gained 2 Singapore cents, or 0.6 percent, to = S$3.68.

In Singapore, CapitaLand, Southeast Asia's biggest = developer,=20 rose 2.6 percent to S$5.9 as of 4 p.m. in Hong Kong. The = shares=20 tumbled 5 percent yesterday, the most in five months. City=20 Developments rose 40 cents, or 3.3 percent, to S$12.70. = Suntec REIT=20 was unchanged at S$1.62.

Dirty Air

``The air quality in Hong Kong is now regularly so poor = that the=20 long-term competitiveness of this city state is, in our = minds, in=20 some doubt,'' White said in the note to clients.

Dirty air costs the city about HK$21.2 billion ($2.7 = billion) a=20 year in hospital admissions and lost productivity, and about = 1,600=20 deaths a year might be avoided if air quality improves, = according to=20 research by three universities and a think tank.

Still, Goldman Sachs Group Inc. property analyst Anthony = Wu said=20 he didn't see air pollution as a key factor in the outlook = for=20 office companies.

``It's the money, not the air that drives business = prospects,''=20 Wu said today. ``It matters to the housing market more than = the=20 office market.''

Hong Kong's air pollution comes from local vehicles and = the=20 generating stations of Hong Kong's two power utilities, = Hongkong=20 Electric Holdings Ltd. and CLP Holdings Ltd., as well as = from=20 mainland China, according to the government and lobby = groups.

Smog Remedies

Hong Kong Chief Executive Donald Tsang last month = announced plans=20 to enforce emission caps on power companies and give tax = breaks for=20 cleaner vehicles.

A government-appointed body said the city's air pollution = can be=20 cleaned up for HK$51 billion if measures are implemented=20 immediately, the South China Morning Post reported on Nov. = 18,=20 citing a report on air quality.

The estimated costs include HK$27 billion to be borne by = power=20 companies switching to low-sulfur coal and aiming to burn = only=20 liquid natural gas by 2010.

Hong Kong fell 12 places to 32nd in a survey of the most- = attractive cities for expatriates because of poor air = quality, human=20 resources group ECA International said in April. The city of = 7=20 million gets emissions from neighboring Guangdong, one of = China's=20 fastest-growing industrial provinces.

Ratings Cut

Merrill Lynch property analysts Keith Leung and Miranda = Lai cut=20 the rating of Hongkong Land, one of the city's largest=20 business-district property owners, to ``sell'' from = ``neutral.''=20 Hysan Development, the biggest landlord in the city's = Causeway Bay=20 district, fell to ``sell'' from ``buy.'' Great Eagle, a = developer,=20 was reduced to ``sell'' from ``neutral.'' The analysts cited = the=20 opening of Union Square in Kowloon and lack of space in = Central as=20 contributing factors to the downgrade.

``The environment is a factor, we're not sure how much, = but it is=20 a factor,'' Lai said.

Hong Kong stock exchange Chairman Ronald Arculli cited = air=20 pollution as a threat to the city's competitiveness, the = Financial=20 Times reported yesterday.

To contact the reporter on this story: Ken Sweet in Hong = Kong at=20 ksweet@bloomberg.net=20

Last Updated: November 21, 2006 03:33 EST=20

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