Why has China Vanke arrived in Tsuen Wan now? I smell politics

There is no compelling financial explanation for the absence of mainland property developers from the city until now, but several political ones

PUBLISHED : Saturday, 26 January, 2013, 12:00am
UPDATED : Saturday, 26 January, 2013, 5:00am

On Wednesday, China Vanke, the mainland's largest property developer, created a stir by acquiring a residential site on the Tsuen Wan waterfront in partnership with New World Development. It was Vanke's first foray into the local property market.

The big question is, why now? Most analysts have come up with economic and financial explanations. I, however, smell politics.

Let us take a look at the economic reasons first. The primary one being given is that a drop in profit margin has pushed mainland developers into the potentially lucrative Hong Kong market.

It is true that the good old days of windfall profit have long gone, given Beijing's tight control over the housing market. Debt-ridden local governments are becoming serious about collecting windfall taxes that can shave as much as 60 per cent off a developer's operating profit.

Mainland developers have seen their profit margin drop by more than a quarter, to about 25 per cent, over the past five years. The 45 per cent margin enjoyed by their Hong Kong peers is mouth-watering. Yet this has been true for some years.

Some say that mainland developers have not had the huge balance sheets until recently to compete with the tycoons who have monopolised Hong Kong property development for years.

Well, Vanke may not know the city as well as the Hong Kong tycoons. Yet this privately owned developer has made itself the biggest against its state-owned and cash-rich rivals. It sold 140 billion yuan worth of houses all over the country last year. Sales of new homes in Hong Kong totalled HK$131.8 billion.

Some say a Hong Kong presence will allow mainland developers to tap into the growing demand of mainland buyers who have been discouraged from investing in houses back home by Beijing. It will also help in brand-building back home. True, but that cannot explain the timing.

So why now? I asked two industry sources. They said the right question is, why have mainland developers vanished from Hong Kong since the 1997 handover?

Indeed. State-owned developers were seen in almost every land auction before the handover, "contributing" to the prosperity and stability of the city. Among them was China Overseas Land & Investment, which paid HK$13,000 per square foot for a site in Stanley in 1997.

The trend abruptly stopped after the Asian financial crisis. Beijing had discouraged mainland developers from the Hong Kong market, according to my sources, the reason being the tremendous losses suffered by the red chips. China Overseas wrote off about HK$2 billion in 1998, largely caused by the Stanley project. Many more have taken years to recover.

Some said local tycoons have been lobbying the Hong Kong and Macau Affairs Office to preserve their turf. The fact is, the tycoons had 15 years of unchallenged oligopolies during which they developed unrivalled financial and political dominance. That was until August 2011, when China Overseas submitted a high-profile bid for a North Point site.

In March last year, China Overseas won a site in Ap Lei Chau for HK$2.54 billion and the vice-chairman of Guangdong-based Agile Property acquired another in Sai Kung for HK$700 million. In May, China Merchants Property Development bought into Hong Kong-listed Tonic Industries. Within weeks, Vanke acquired Winsor Properties for HK$1.08 billion.

In a country where the government has the veto over business decisions, there is nothing called coincidence. Business considerations certainly matter in these deals, but it is hard to imagine how they could have happened without political approval.

I know no source who can tell me why these deals can be done now but not earlier. All I can see is the effect it has on the city's power balance.

It will be naive to say that the arrival of mainland developers will break the oligopoly in the property market, which is built on not just knowledge and financial clout but also a complicated web of connections in the private and public sectors.

However, outsiders and uncertainty have now been introduced. Yes, Vanke is starting through a joint venture with an incumbent, but who knows where it is heading.

Last month, the veteran Hong Kong and Macau Affairs official Zhang Xiaoming replaced Peng Qinghua, who has headed the liaison office of the central government for almost a decade and built strong local connections. In March, Beijing made Leung Chun-ying, an outcast in various power groups, the Chief Executive of Hong Kong, instead of Henry Tang, who had the public blessing of incumbent interests, in particular the property tycoons.

Is it a shake-up of the so-called government triumvirate - the tycoons, the government officials and the Beijing representative in town? Well, that is not something a humble financial columnist can answer.