Profits of Boom
The big profits made by developers over the past year are tangible testimony to the residential market's continued strength, characterised by strong demand and tight supply, a solid economy and record low mortgage rates.
Not surprisingly, luxury home sales have contributed a substantial amount of earnings to the stellar financial results of property giants.
Sino Land, a top-three developer in terms of sales, has many luxury projects such as the villas at St Andrews Place, overlooking the Beas River Country Club in Fanling. The company made a net profit of HK$5.34 billion during the six months that ended on 31 December, up 62 per cent year-on-year. Excluding property revaluation gains, its underlying profit grew to HK$2.43 billion from HK$2.03 billion.
The Hermitage, a newly completed residential project in Tai Kok Tsui, was the main driver to earnings growth. Sales revenue also came from The Palazzo, The Balmoral, Goodwood Park, Lake Silver, One New York, The Dynasty, Vision City and Vista.
The interim net profit of market leader Sun Hung Kai Properties (SHKP) rose by 36 per cent to HK$21.02 billion, while underlying profit, excluding property revaluations, surged by 60 per cent to a record HK$10.4 billion.
Robust sales of two large-scale luxury projects, Valais at Beas River and Larvotto in Ap Lei Chau, contributed to the strong result. Sales proceeds of Hong Kong properties amounted to HK$21.26 billion during the six-month period to 31 December.
Four projects with 2.4 million sqft of attributable gross floor area, including 2.1 million sqft of residential space, were completed during the interim period, while another 400,000 sqft is scheduled for completion in the second half of the financial year.
The underlying profit of another major player, New World Development, soared by 30 per cent to HK$2.35 billion. Its property sales proceeds from Hong Kong jumped 2.64 times to HK$2.21 billion for the six months to 31 December.
Thanks to strong sales in Island Crest and Primrose Hill, and Larvotto - its joint venture with Sun Hung Kai Properties - Kerry Properties reported a 44 per cent increase in net profits to HK$ 6.3 billion, before accounting adjustments, for last year.
The 2010 full-year net profit of MTR Corporation grew by 25.1 per cent to HK$12.06 billion from better home sales, high local patronage growth and fare adjustments. The railway operator, or developer from an earnings point of view, said profit from property development was HK$4.03 billion, up 13.5 per cent year-on-year, with the major contribution from Le Prestige at LOHAS Park in Tseung Kwan O. Sales of The Palazzo in Fo Tan and Lake Silver in Wu Kai Sha also generated profits.
The strong results of property developers are within market expectations, given the strong sales of new residential projects in the primary market, while home prices shot up. The momentum has been so strong that the government had to intervene with cooling measures, such as stricter mortgage requirements and punitive stamp duties, to curb speculation and a pledge to boost land supply.
There are mixed feelings over the developers' financial results. Brokerage houses on the bullish side have lifted the target prices of their preferred stocks such as SHKP. But some property analysts are more cautious in the light of continuing concerns about further government intervention and how long the price rally can last.
Jeff Yau, property analyst of DBS Vickers Securities, says developers will continue to cash in with the sales of new residential projects this year and the near-term outlook remains positive. Sino Land has several projects scheduled for sale, including a luxury development in Broadcast Drive and the large-scale project in Pak Shek Kok.
SHKP wants to sell HK$28 billion worth of homes this year and projects include Avignon in Tuen Mun, Imperial Cullinan in West Kowloon, One Regent Place in Yuen Long, and a project above the Tseung Kwan O MTR Station.
'Property stocks continue to command attractive discounts to their net asset value at current prices. The near-term supply of new flats will be very tight. The exceptionally low-interest rate environment also bodes well. But there is a risk of further policy initiatives to cool down the market as the government is not likely to tolerate runaway home prices,' Yau says.
Sino Land's chairman Robert Ng Chee-siong says that with the local GDP rising, improved employment prospects, good affordability, low mortgage rates, favourable residential properties' rental yields and increasing marriages and births, the outlook of the local property market is positive.
SHKP also expresses its confidence in the market, saying: 'Increasing integration with the mainland means that more well-off mainlanders will contribute extra demand for properties in Hong Kong.'
Citicorp's Hong Kong property analyst Ken Yeung, though, says stock investors are cautious.
'There are grave concerns about further government measures to control the property market. Investors are also pondering whether and when a price correction will occur after such a strong bull run,' Yeung says.