Sun Hung Kai Properties

SHKP's Shanghai project signals new China strategy

Developer seen expanding on mainland with plans for investment that could top HK$50b

PUBLISHED : Friday, 13 September, 2013, 12:00am
UPDATED : Friday, 13 September, 2013, 11:27pm

Sun Hung Kai Properties' plans for its biggest mainland commercial development, a Shanghai project involving an investment of HK$40 billion, could signal that Hong Kong's largest developer by market value is finally focusing its attention across the border.

Faced with limited development opportunities and increased policy risk in Hong Kong because of the government's adoption of market-cooling measures, analysts expect SHKP will become more active on the mainland.

"Considering its company size, it has lagged behind rivals in terms of revenue coming from across the border," said Kenny Tang Sing-hing, a general manager at AMTD Financial Planning. "It is time for the giant to catch up with its peers."

For the year ended June, SHKP's mainland property sales were about HK$10 billion, with rental receipts totalling about HK$2.07 billion. That compares with Wharf's 15 billion yuan (HK$19 billion) in mainland property sales and HK$1 billion in rental income and Cheung Kong's HK$13 billion in property sales last year.

Tang was speaking after SHKP secured a 1.06 million square foot office-retail-hotel site in Xujiahui, a shopping and entertainment district in Shanghai, for 21.77 billion yuan on September 5. It was the second-highest price paid for a block of land on the mainland, trailing only the former Asian Games city site in Guangzhou, which sold for 25.5 billion yuan in 2010.

Taking construction and interest expenses into account, analysts estimate SHKP's total investment in the project could exceed HK$50 billion.

Such a massive investment in the Xujiahui project, which will yield 8.44 million square feet of gross floor area - nearly double the space of Hong Kong's IFC development in Central - would equate to 14.2 per cent of SHKP's HK$350.95 billion total asset value at the end of June last year.

In 2007, the developer said it aimed to lift its mainland investments to 30 per cent of total asset value. So far, it has invested 25 per cent of its net asset value.

It is time for [Sun Hung Kai Properties] to catch up with its peers

Adrian Ngan, an executive director of property equities research at Citic Securities, said SHKP's land acquisition spree in Hong Kong would slow down. "Imagine the [Xujiahui] project will tie up HK$50 billion over the next seven years," he said. "For the next 12 months, it will be less keen on bidding for land."

Conditions of the sale say construction work should start within 12 months of the handover of the Xujiahui site, with the development completed within seven years of the start of work. The developer is also required to hold 60 per cent of the gross floor area for at least 10 years.

Ngan said land prices in Hong Kong would come under downward pressure with one fewer developer competing for land at a time the government was seeking to increase supply.

Research conducted by the South China Morning Post in July found that SHKP and Cheung Kong had scaled back land acquisitions sharply after the government rolled out a series of curbs in October last year in a bid to rein in property prices. Including a HK$751 million site in Yuen Long it won last week, SHKP has spent less than HK$5 billion acquiring land in Hong Kong since October, down 60 per cent year on year. Cheung Kong has bought just one site, for HK$2.9 billion, in the same period, down 54 per cent year on year.

Ngan said he believed SHKP would be selective when acquiring land on the mainland.

"Look at its landmark investment properties. Shanghai IFC and International APM are all located in prime areas," he said. "Its strategy of building top-notch investment properties in top locations has proved successful.

"The price of the [Xujiahui] site is jaw-dropping but it will not be a mistake. As long as SHKP has the staying power, it will ultimately be a winner."

Ngan said SHKP's expertise in managing shopping centres and offices would greatly enhance the property's rental receipts and value in the long term.

Citi Research expects Xujiahui to generate three billion yuan in annual rental income.

Ngan said SHKP would take a different approach from mainland developers, which focused on residential projects even when they expanded overseas.

He said Hong Kong developers such as SHKP and Swire Properties preferred to focus on building investment properties, instead of mass homes, because they enjoyed an edge over domestic rivals, thanks to decades of experience in managing shopping malls and grade A offices.