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China Property

Yuzhou Properties says Hong Kong’s low financing costs attractive to mainland developers

Chairman Lam Lung-on sees mainland home prices rising 10 per cent in the second half on pent-up demand

PUBLISHED : Tuesday, 06 September, 2016, 2:08pm
UPDATED : Tuesday, 06 September, 2016, 4:28pm

Medium-sized mainland Chinese developer Yuzhou Properties joined its bigger rivals in expanding to Hong Kong, making its foray into the city’s market in 2014. Lam Lung-on, the founder and chairman of the Fujian company, said the 27-storey luxury residential project in the prime West Mid-Levels area on Hong Kong Island, was expected to be completed by the end of next year, providing 80 units. He said Hong Kong’s low financing cost was very attractive to mainland developers and his company would keep looking for opportunities to invest in the city’s housing market.

What is your sales plan for your Hong Kong project?

The 80 flats are worth about HK$700 million to HK$800 million. The project will not make a big contribution to the group’s sales but it gives us an opportunity to learn design and construction skills from the Hong Kong team.

We plan to either sell or keep the flats as service apartments as both are good choices. If we sell, the average price will be more than HK$30,000 per square foot, compared with our cost of HK$11,000 per square foot. If we rent them out, the annual return could be more than 5 per cent. As we are listed in Hong Kong, the project can provide cash to support our office operations in the city.

Do you think Hong Kong is a good market to invest in?

The development approval process in Hong Kong is very transparent and follows the rules. It is good for developers. The financing cost here is also low, only 2 per cent (annually), much cheaper than the 5 to 6 per cent on the mainland. That absolute advantage has prompted us to consider holding the property.

Hong Kong is really a market for global buyers. We may even sell the property as some parties have approached us and shown interest in buying the whole building. It all depends.

We will continue to seek opportunities to buy land in Hong Kong, especially in prime areas on Hong Kong Island. But our focus is still mainland China’s home market.

We have no plans to expand to other countries as we are not familiar with those markets.

What is your outlook for the mainland Chinese housing market?

We expect most first and second-tier cities to see home prices rise a further 10 per cent in the second half. Despite strong sales since late last year, there is still much pent-up demand. The demand will continue to grow significantly.

There are three reasons why we are positive about the markets in big cities.

Local governments should conduct land sales on a regular basis to cool the market

First, their economic foundation, especially those cities in the Yangtze River Delta. They are far stronger than most cities in the US and Europe, with their gross domestic product expanding more than 6 per cent a year. The fast-growing economy will create more first-home buyers and upgraders.

Bigger cities also have sound education and medical systems that will encourage population growth, which will help drive up home prices as land supply is limited.

Finally, the two-child policy will also increase the populations of cities, and many families will want bigger homes.

With such strong demand, we expect the property market in first and second-tier cities to stay robust in the next five years.

For smaller cities, the market will be stable as local governments have introduced many supportive policies.

Hot cities such as Nanjing and Xiamen have recently tightened home buying rules to cool the market. Are you worried the policy change will affect your sales?

Overall, clearing unsold homes is one of the major tasks for the central government this year, so we believe the authorities will not roll out tough restrictive policies to reverse the market like what they did in 2012. In particular, restrictions on the number of homes one family can buy is not a market way and can lead to ethical problems as many couples divorce for the sake of buying one more flat.

The government could introduce more policies such as tightening credit and expanding the use of housing provident funds to allow the market to adjust.

Local governments should also conduct land sales on a regular basis to cool the market.

What is your company’s goal in the next three to five years?

We are maintaining our goal of 30 billion yuan (HK$34.8 billion) in contracted sales for 2018 and 50 billion yuan for 2020. Although sales are growing rapidly, there is no need to set a new goal as we do not want to sacrifice margins for scale.

Shareholders’ interest is always our priority. We have promised our dividend payout will not be less than 30 per cent of core profit. We are confident our dividend this year will increase from last year’s 18 HK cents per share.

The cost mentioned in Lam Lung-on’s first answer should have read HK$11,000 per square foot, not per square metre