HAMMER BLOWS

THE politics of property has historically been a low-key affair in Hong Kong. For years, the development industry has beaten its breast in private when unhappy with Government policy and been a willing participant in the limited land-release equation. Of late that has changed, and the Government has been seen to be in conflict with the property developers, which account for about 40 per cent of stock market capitalisation and which have amassed enough wealth to underpin the economy of Hong Kong. How a relationship which holds so many shared interests could become so frayed is difficult to fathom. Indeed there are few about town who will publicly admit to a rift at all. But falling out there has been, and last Tuesday's sparse attendance at a Government land auction which had mainland-backed CITIC Pacific as the sole bidder is the latest twist in a tale which historians may later view as part of the power-shift that changed the territory in the run-up to 1997. By Thursday a rapprochement between the two groupings had been made and the Government was promising to pull back from further interference in the market. But the after-taste of Tuesday's auction remains. Certainly market sentiment was poor, the sites on offer at best average and the opening price high, but only the naive will accept these as the only factors influencing the developers' absence. Most sources at development firms or those in close contact cited the investigation by the Independent Commission Against Corruption (ICAC) into alleged cartel bidding at the May 26 auction as a major factor. According to authoritative sources, the ICAC investigation had the direct approval of Governor Chris Patten, who has personally pushed for a rigorous inquiry. Officers of the commission were told to pursue the issue with full haste, and those present at the auction had been ''questioned exhaustively'' said a source at one of the companies concerned. ''Let's face it, the auction has been run this way for years and none of those present would have known they were breaking the rules. You cannot separate what happened on Tuesday with their annoyance at having what they see as their private club rules played with,'' said a developer. Of course, there is nothing in the rules compelling developers to make bids, and cogent arguments have been made for their staying away last Tuesday. The auctioneer's opening shot for the main Tai Po site was $950 million. That was in line with the final sale price forecast by Crosby Securities property analyst Nichols Pang. Given the bearish sentiment and the high opening price, it was possible that potential bidders had simply been frightened off, he said. Details of exactly what manoeuvres preceded the auction are unlikely to be made public. The developers are a tight-knit community rarely given to revealing their inner thoughts publicly. However, it seems that following the May 26 auction debacle, which prompted the ICAC investigation, the developers decided to maintain a united front. Well placed sources said Leung Chi-kin of New World Development had been designated as the sole member of the inner circle who would comment on the Government action. Mr Leung could not be contacted for comment. Considering that CITIC Pacific had never previously bid alone at a Government land auction, it made a spectacular entrance as the sole and successful bidder. There was speculation last week that the absence of opposition was a means of demonstrating the land price level that Beijing considers appropriate for the territory. If so, then Beijing has further extended its influence into one of the Government's central taxation sources and macro-economic controls. ''CITIC is now a very important force in Hong Kong and it is possible that rival developers didn't want to bid against them,'' said another source. Its presence, however, could only be a positive thing for Hong Kong since it demonstrated China's commitment to supporting the property market, said Nomura Research Institute research director Michael Green. Given that Hong Kong land auctions were open to foreign and domestic buyers, he said it was not possible for developers to affect Government policy through boycotting an auction. ''In a free market there will always be a price which will satisfy a buyer somewhere,'' he said. It could, of course, be argued that in reality there are few outside buyers in receipt of sufficient market knowledge effectively to fill the gap of the local developers. The current breakdown in relations goes beyond the pro-active Government policy since April. Developer frustration had been building over the last few years. Delays in granting planning permission and land use changes were pre-eminent among their grievances, but the threat of a Consumer Council investigation into alleged hoarding of completed units brought tensions to a new head in the early part of the year. Most importantly, the anti-speculation package of measures announced by the Government's taskforce is already hitting directly at the developers' bottom line. Limiting the quota of flats available for pre-sale period from 50 to 10 per cent has already had an impact on the cash-flow positions of the developers, who are facing an end-user market starved of bank finance and unsure whether price falls have reached the bottom. Developers have taken on the role of de facto bankers to provide end-users with mortgages, which is causing a growing drain on capital resources. Hence the urgent need to get a mortgage security programme up and running. Recent years have seen the established firms earn record margins due to their land banks. Profits are being booked against sales typically dating back to the 1970s, when land cost was a fraction of its present level. Increasingly, firms will be drawing down on a more expensive land bank with the consequence of reduced profit margins. Irrespective of the level where property prices stabilise, the halcyon days of printing money as a mass residential developer are over, and the big firms know it. Next year and 1996 would be tough years for most of the developers and there was likely to be a ''slippage in earnings'', said SBCI property analyst Adrian Ngan. Mr Green said it would no longer be possible to predict developer earnings with certainty since the market would be characterised by higher volatility and risk. In preparation for those tougher times, the battles which have been and are still being fought between the Government and developers make all the more sense.