china property
image

China Property

Hong Kong developers’ competitive edge in China slipping away

Devaluation of the yuan, economic slowdown, high inventories and surging land costs prompt new investment strategy

PUBLISHED : Friday, 15 January, 2016, 11:13am
UPDATED : Saturday, 16 January, 2016, 3:06am

The sale of mainland assets by a number of Hong Kong developers in the past few months may be probably just a coincidence, but the moves are a sign that their competitive advantages have been slipping away as the mainland market develops and Chinese developers grow at a rapid pace.

The devaluation of the yuan, economic slowdown, high inventories and surging land costs have also added to the reasons forcing Hong Kong developers, who invested heavily on the mainland during the 1990s, to adopt a new investment strategy in the mainland property market.

David Hong, head of research at China Real Estate Information’s Hong Kong office, said Hong Kong developers had been losing competitive advantages against mainland developers due to their smaller development scale and weakness in home sales execution.

“I am not optimistic about Hong Kong developers’ property investment prospects in China,” he said.

In the latest of a string of asset sales, companies controlled by Cheng Yu-tung’s family sold a number of assets for more than HK$40 billion.

New World China Land last month sold three projects – in Hubei, Guangdong and Hainan provinces – to Evergrande Real Estate for HK$16.36 billion. Early this month, New World Development and controlling shareholder Chow Tai Fook Enterprises announced the sale of five projects on the mainland to Evergrande for HK$24.4 billion.

In a meeting with reporters on Monday, Henry Cheng Kar-shun, chairman of the family’s listed flagship New World Development, reiterated that its recent asset disposals in inland cities did not mean it was withdrawing from mainland China.

Instead, it was shifting its investment focus from inland cities to first-tier cities to go for higher profit margins.

They will be more cautious in the wake of a falling Chinese currency and slowing economy
David Hong, China Real Estate Information

For Hong Kong companies, Cheng said that development costs in inland cities could be higher than they were for local players.

Analysts said that with large-scale developments nationwide, mainland developers could accept thin profit margins because they went for sales volume. But Hong Kong players, with smaller-scale developments and a slower development pace, looked for high profit margins. That made Hong Kong developers less competitive.

Total sales of New World China for the year ended June 2015 amounted to 15.43 billion yuan.

However, China Vanke, the nation’s largest home builder, saw total sales for the calender year of 2015 reach 261.5 billion yuan, up 21.5 per cent year on year. Evergrande Real Estate, China’s second-largest residential developer, said sales amounted to 201.3 billion yuan, a rise of 53 per cent from 2014.

Apart from Cheng’s New World, Hong Kong-listed Chinese Estates and CC Land also announced separate sales of mainland assets to Evergrande in the past few months.

Cheung Kong Property Holdings, controlled by Hong Kong’s richest man Li Ka-shing, has sold a number of big property assets in the past few years, including the Oriental Financial Centre in Shanghai’s Lujiazui district for HK$8.96 billion in 2013.

In August, Cheung Kong Property reportedly put on sale a commercial complex in Shanghai’s Pudong area, due to open next year, for 20 billion yuan. No deal has been clinched so far but the series of asset sales triggered criticism from some mainland media.

READ MORE: Smaller Hong Kong developers encounter difficulties in gaining a foothold in mainland China

“We cannot say they are pulling out of China. But they will be more cautious in the wake of a falling Chinese currency and slowing economy. They may look for other opportunities in Hong Kong or overseas,” Hong said. “In the past couple of decades, Hong Kong’s well known developers were the darlings of local government officials because they brought in money and enhanced the reputation of their cities.”

To lure their investment, local authorities offered them incentives or cheap land. As a result, Hong Kong developers made profits through the surge in land values, he said.

“But I believe local authorities now prefer to bring in big mainland players such as China Vanke because their investments are big, property sales turnover is fast and they will keep investing,” Hong said.

As the mainland market develops to a more mature stage , analysts said the business model adopted by Hong Kong developers when investing in China was no longer applicable.

They prefer to buy land at low cost and hoard land for long periods in the hope of benefitting from the rise in land values.

“The land price is very high now. Despite home prices falling, land prices even in third- or fourth-tier cities do not drop at all,” said Lee Wee Liat, head of Asia-Pacific property research at BNP Paribas.

READ MORE: Mainland China property market expected to see better balance of demand and supply

The increasing land costs require developers to strengthen fast turnover. “But Hong Kong developers’ problem is their sales execution is very slow. It is better to sell land to those who can do a better job,” Lee said, adding that mainland developers were very good at speed up sales.

To maintain high cash flow, China Vanke requires project managers to sell 60 per cent of units within one month of launch.

Some developers on the mainland such as Shimao Properties start pre-sales within six months of buying land, whereas Hong Kong developers often take one or two years.

A former senior executive at a Hong Kong developer focused on the mainland market said: “The business is getting harder. The margin returns to a normal level (compared to exorbitant profit in the past).”

It was no surprise to see Hong Kong developers exiting the mainland market, he said.

 

business-article-page