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SCMP Reporter

But as developers cheer, analysts see pressure on margins

The government's  land auction yesterday may have given Hong Kong's property market a significant lift, but observers differ over how sustainable the gains will  be.

Developers may face diminishing profit margins, as soaring site acquisition costs may not necessarily translate into equivalently higher flat prices.

The purchase by Cheung Kong (Holdings) of a 191,126 square foot parcel in Ho Man Tin for  $9.42 billion - far higher than the market consensus of $6.5 billion to $7.5 billion - left some analysts puzzled.

With a projected gross floor area of about 1.72 million sqft, the  price works out to $5,476 per square foot, excluding construction costs.

Lehman Brothers analyst Anthony Wu Yat-wai said the project would have to be sold at an average of more than $9,000 per square foot if Cheung Kong hoped to achieve a 30 per cent profit margin.

'That means residential prices in the district have to increase more than 40 per cent in two years,' Mr Wu said.

Sun Hung Kai Properties' winning bid of $4.7 billion for a 136,714 sqft site in San Po Kong was somewhat less astonishing.

Market consensus   had been $3.6 billion to $4.3 billion. With an estimated plot ratio of nine, the site could yield a gross floor area of 1.23 million sqft, yielding a purchase price of $3,821 per square foot.

Developers cheered the buoyant results - and immediately lifted  prices at their existing projects. Cheung Kong said it would raise prices for its One Beacon Hill project by 4 per cent next month. Sino Land said it would increase prices for all its projects by 5 to 7 per cent.

Sun Hung Kai Properties and Henderson Land suspended sales at all their projects, hinting at price increases when they reopen for business.

Property agencies such as Ricacorp Properties  pointed out that sellers in the secondary property market, especially in Ho Man Tin, had raised asking prices by as much as 20 per cent after the auction yesterday.

However, independent property analysts  reacted cautiously.

'The unexpectedly high bids will translate into higher residential asking prices,' Mr Wu said.

But that did not guarantee that higher transaction prices would follow, he added.

'If transaction prices do not show significant increases in the coming two weeks, we can say that the effect on the physical market is limited,' he said.

Mr Wu said the hefty bids would benefit developers such as Sun Hung Kai Properties and Sino Land, which had ample land banks, the most.

'But that has been more or less factored into their share prices already, and the high acquisition cost may not enhance the net asset values of the auction winners much,' he added.

Although the auction  has prompted talk of a market bubble, BNP Paribus Peregrine analyst Adrian Ngan said the risk of a collapse in the near term was minimal.

He noted that the last property bubble grew for almost  10 years before popping six years ago.



Auction prices give property a boost