Fat profit margins may soon be a thing of the past for Hong Kong developers as they get squeezed by falling home prices on one hand and soaring construction costs on the other, coupled with increased competition from mainland rivals that bid up land prices.
Most analysts see home prices in the city falling 10-15 per cent this year, inflicting more pain on developers as they build new projects on land they have been buying at premium prices since 2010.
Hong Kong developers enjoyed gross profit margins as high as 40 per cent in 2009 and 2010, Nicole Wong, CLSA’s regional head of property research, said.
However, for projects on sites developers bought in the past few years, profit margins would shrink to between 20 per cent and 25 per cent, she said.
In 2010 developers aggressive bid up prices for residential sites, particularly those designated for luxury homes, as more than 40 per cent of these homes were being bought by cashed-up mainlanders.
In March that year, Sun Hung Kai Properties paid HK$10.9 billion for a residential plot in Ho Man Tin, the second-highest price ever for a development site. It translated to a land cost of HK$12,540 per buildable square foot.
A month later, Wharf (Holdings) and Nan Fung Development paid HK$10.4 billion, or HK$32,014 per buildable square foot, for a site in Mount Nicholson Road on The Peak, the third-highest price ever paid for a plot.
The most expensive site on record was a plot in Siu Sai Wan, bought by Sino Land in 1997 for HK$11.82 billion, on which it built Island Resort.
SHKP said last week the Ho Man Tin project would be released for sale this year.
Alfred Lau, a property analyst at Bocom International, said flat prices at that project would be about HK$17,000 per sq ft, after taking into account construction costs of between HK$4,000 and HK$5,000 per sq ft, excluding interest expenses.
Compared with the HK$21,000 per sq ft transaction prices being recorded at Dunbar Place, a new project that launched in April last year, the prices at SHKP’s Ho Man Tin project would show the effects of the market downturn, an analyst said.
Paul Louie, head of regional property research at Barclays, said Hong Kong developers have enjoyed “supernormal” profit margins on the back of rapidly rising home prices.
Prices in the city shot up 118 per cent from a low in December 2008 to the peak in March last year, forcing the government to impose extra stamp duties to deflate the housing bubble.
A year after the measures were announced, home prices have dropped about 5 per cent. Citing land prices in Kau To Shan, Sha Tin, for sites sold at government auctions, Louie said they almost doubled from HK$5,332 per sq ft in August 2011 to HK$10,551 per sq ft in May 2012 and further climbed to HK$10,885 per sq ft in March last year.
“For land bought in 2011, the 24 per cent home price appreciation since then has boosted margins to 35 per cent, while for land bought in 2012, the average margin would be 30 per cent,” he said. “For land bought in 2013, the average margin will only be 20 per cent.”
Adding to developers’ misery, property consultants said more than 13,000 new flats – 30 per cent more than last year – are scheduled to be launched for presale this year.
To drum up sales, developers have been forced to offer discounts and stamp duty subsidies to offload their projects before buyer liquidity dries up.
Last month, SHKP generated strong response at its Riva development in Yuen Long, but only after it cut selling prices to HK$7,600-HK$12,400 per square foot, up to 45 per cent below prices charged at the launch of the first units in the project a year ago.
Wong said when more mainland developers join the bidding war for prime development sites, it could further aggravate the operating environment for local developers.
In contrast to Hong Kong players, which have been spoiled by handsome profits for years, she said mainland developers are happy with a 20 per cent margin.
“In Hong Kong, new flats can sell for HK$10,000 per sq ft, but they go for just 1,000 yuan [HK$1,265] per sq ft on the mainland. We will see more mainland developers participating in Hong Kong land sales,” she said.
However, with increased competition from mainland developers keen to replenish their land reserves, Wong said land prices might not sink.
On Wednesday last week, a unit of mainland-backed Poly Property paid HK$3.92 billion, or HK$6,530 per sq ft, to buy the biggest site in Kai Tak. That was 26 per cent more than the HK$5,157 per sq ft fetched by a nearby site in June last year when China Overseas Land and Investment acquired two Kai Tak sites – restricted to buyers who are Hong Kong permanent residents – for HK$4.54 billion.
SHKP, Hong Kong’s second-largest developer, admitted that developers have suffered from shrinking profit margins.
“SHKP will increase flat production to 4,000 and 5,000 a year, from the present 2,000 to 3,000 units, as a way to generate higher sales volume to offset the lower profit,” Thomas Kwok Ping-kwong, the firm’s co-chairman and managing director, said at the firm’s results announcement last week.