Sharp drop in land prices unlikely for prime sites in Hong Kong
Correction in properties in urban areas will be less severe than those in the New Territories
Recent land sales results have shown the government is willing to accept lower offers for its sites.
The trend is reflected in the sale of the Whitehead residential site in Ma On Shan, which Sun Hung Kai Properties bought last month for about HK$1.83 billion or HK$4,241 per square foot, 18 per cent less than a site in the district acquired by Cheung Kong in November 2012.
But the city's current average property price is still 2 per cent higher than in 2012, according to Centaline Property Agency's Centa-City Leading Index, a barometer of the local property market.
Another example of the downward trend is the case of the Lands Department charging a land premium of HK$2.71 billion or HK$2,059 per square foot for phase four of Lohas Park in Tseung Kwan O at the end of last month. The levy was 15 per cent less than that charged for phase three in 2007. Nonetheless, property prices have surged 117 per cent since then.
In another example, Far East Consortium International bought a residential site in Tai Wai for HK$148 million or HK$3,336 per square foot. It is the lowest price paid for a residential site in the eastern New Territories over the past 10 years.
These sales show land prices are falling, the result of higher construction costs and weakening market sentiment.
Developers used to enjoy higher profit margins. As they say it is difficult to cut construction costs, they have lowered their offers for land acquisitions to maintain those margins and cushion the impact of the market downturn.
However, the trend does not mean land prices will drop sharply and all over the city.
For example, Wing Tai Properties paid HK$433 million or HK$9,396 per square foot for a site in Shau Kei Wan. The price is at the upper end of market expectations, even though the site is small.
The different prices for the sites are because of the location. If the site is on Hong Kong Island and in other urban areas with less supply, developers are willing to offer a higher price. The competition for sites in prime locations is strong and local developers are facing rivalry from mainland players.
As land prices on Hong Kong Island remain stable and future home supply is tight, price correction will be less.
Many developers are trying to build more small flats to maintain a higher price or sit on their inventories.
But in the New Territories, property prices will experience a sharp correction when new home supply increases significantly and market sentiment is poor.