Firms expand market share to combat crisis
Leading developers have increased their market share substantially as a result of industry consolidation due to declines in profitability and the impact of the Asian financial crisis.
Standard and Poor's said in a recent report that the leading three companies - Sun Hung Kai Properties, Cheung Kong (Holdings) and Henderson Land Development - had increased their combined market share to more than 50 per cent from more than 30 per cent.
Others such as Swire Pacific and Wharf (Holdings) had been more cautious in undertaking key investments while a number of smaller companies had already exited the market, S&P said.
The report said earnings for property companies had remained weak over the past few years. Operating margins had declined and were likely to remain at about the 38 per cent recorded last year compared with more than 50 per cent in 1996 and 1997.
The credit rating agency said the supply of private housing would remain high, averaging 30,000 units a year over the next two years. Inventory overhang was likely to remain a feature of the market for some time.
While supply and demand were likely to return to equilibrium in the medium term, any return to high profitability with margins in excess of 50 per cent was unlikely in the foreseeable future.
The agency said a long production cycle, averaging three to five years, made adjustments to the level of oversupply difficult.
Given the capital intensive nature of Hong Kong's property development sector, high levels of cash were locked up for most of the production period.
Land costs, typically accounting for 50 to 70 per cent of total costs, usually required upfront cash payment to the Government, either for land acquired via public auctions or tenders, or for changes in designated land use.
In addition, construction costs and interest costs had to be paid over the construction period. But presale of flats was not allowed until 20 months before the completion date.
The high holding costs left little room for developers to delay construction as presales were prohibited before construction started, the agency said.
Although some developers postponed construction during the Asian crisis, many were forced to proceed with launches at low margins or even at a loss because of the need to raise cash.
Numerous projects were now ready for sale because many developers sharply increased their inventories during the market peak in 1996 and 1997. The high supply levels of recent years would continue until developers had cleared their high-cost inventories, the agency said.