• Fri
  • Jul 11, 2014
  • Updated: 9:32pm

Underlying demand good news for Kwoks

PUBLISHED : Friday, 16 September, 2005, 12:00am
UPDATED : Friday, 16 September, 2005, 12:00am

Strong demand and tight supply in the housing market are fattening margins at Sun Hung Kai Properties and lifting profits.


Even stripping out the one-off gains from asset sales which flattered yesterday's 49.8 per cent rise in full-year net income, pretax profits still rose by 26 per cent, reflecting the 35 per cent profit margin the company now earns on its developments.


Plentiful liquidity and a limited supply of new homes have driven average flat prices up by about 65 per cent since their post-Sars low in 2003. Prices at the luxury end of the market have risen even more, helping to boost the developer's profits on property sales by 82 per cent last year, more than enough to offset dwindling earnings on its telecommunications business and higher financing costs.


The good news for the Kwok brothers who run the firm is that the supply and demand equation responsible for driving up their profits is unlikely to change soon.


Although recent interest-rate increases have scared off some speculative buyers, underlying demand for new flats remains strong.


At about 52 per cent of average income, average mortgage costs are well below their historical mean of 66 per cent. With salaries rising and inflation-adjusted interest rates still low, Hong Kong property remains more affordable than at any time during the 1990s. Demand is correspondingly healthy.


Supply, however, is limited. According to John Saunders, the head of property research at brokerage firm CLSA, Hong Kong's natural demand for new homes is running at about 40,000 units per year. Supply this year will be about 22,000, falling to 18,000 next year and 15,000 in 2007. The shortage will help support prices. Mr Saunders is predicting a rise of between 20 and 25 per cent this year.


Although the government could increase the supply of building land, either by reintroducing regular auctions or by easing the premium developers pay to convert land designated for farming to residential use, there are few signs of it doing either.


Even if it did, SHKP, with its strong balance sheet and 21 million square feet bank of agricultural land, would still be in a relatively favourable position. But with supply looking set to remain tight, analysts are predicting another big rise in earnings next year.


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