The recent sale of a parcel of prime commercial land in Mong Kok for 61 per cent less than the HK$12 billion (US$1.53 billion) some thought it might be worth is likely to mean a more handsome margin for Sun Hung Kai Properties (SHKP), rather than any profound change to the city’s real estate fundamentals, according to analysts. SHKP prevailed over two other bidders to secure the 124,184 sq ft plot on March 1, winning the right to develop and lease the land for 50 years for HK$4.73 billion. That price is 35 per cent below the HK$7.3 million that property consultant Colliers estimated as the low end of the land’s value, and 61 per cent below the HK$12 billion it cited as the high end of the range. Market observers were left to wonder whether the lower-than-expected bid indicates that lower rents or selling prices lie ahead in the property market, as well as what the transaction says about future government land sales. The deal is “very good for SHKP”, said Raymond Cheng, managing director and head of China/Hong Kong research and property at CGS-CIMB Securities. “The winning bid could be considered surprisingly low,” Cheng said. “It was a reflection of the current state of the market, particularly the office and retail segments. We expect office property prices to drop by 5 to 10 per cent year on year for 2023.” SHKP plans to construct a 320-metre building with 1.52 million square feet of space on the site, which will be the “largest landmark office cum shopping centre in Mong Kok”, Raymond Kwok Ping-luen, SHKP’s chairman and managing director, said in a statement released on March 1. Even given some constraints on construction on the site, the effective costs will end up being between HK$4,000 and HK$5,000 per square foot, “which is still quite cheap”, said CGS-CIMB’s Cheng. “Our conservative estimate of the initial yield of about 5.5 per cent is quite high versus the average of 3 per cent during normal times,” Cheng said. The property market will likely have recovered by the time SHKP starts pre-leasing the project, said Martin Wong, director and head of research and consultancy for Greater China at Knight Frank. “The commercial property market is expected to be better than the status quo in a few years,” he said. “Rental performance will be better after 2025, when the market is gradually moving from a tenant market to a balanced market.” 12 sites in Hong Kong land sale programme expected to provide 9,000 flats Now is a fortuitous time for developers to acquire parcels of land for their projects, according to international property consultant JLL. “It is the right time for developers with a good balance sheet and strong holding power such as SHKP to enter the market,” said Joseph Tsang, chairman of JLL’s Hong Kong office, as the medium-term outlook is strong. However, buyers and renters should not count on seeing lower costs trickle down to them, analysts said. Budget 2023-24: Hong Kong records lowest land sale revenue in 7 years “It does not directly translate to cheaper office prices and rents when the buildings are completed,” said Alkan Au, senior director of valuation advisory at JLL’s Hong Kong office. “Developers are conservative in land biddings as the prevailing development costs are high, including the interest-rate environment and construction costs.” The current environment means higher risks for developers, given the poor uptake of office space at the moment, Au said, adding that they are being more conservative in their bidding as a way to minimise risk. “ SHKP will not only pay $4.7 billion for the site, but will invest a huge amount of capital and effort into developing the second-tallest commercial landmark complex in Kowloon,” said a representative from the developer, which plans to complete the project by 2030. ‘Cautiously optimistic’ Sino Land set to launch some 2,100 flats this year The tender came in the wake of unsuccessful sales of three other parcels of land – in Lantau Island’s Oyster Bay , Kwun Tong , and Stanley – so far this year, an occurrence that likely convinced the Lands Department to adjust its expectations for the Mong Kok site, said Hannah Jeong, head of valuation and advisory services at Colliers. “Due to lower land costs, [SHKP] may be able to offer a more reasonable rental level to the potential tenants,” she said. “Their construction costs, including financing costs required for the subject site, are significant. Therefore the developer reflected those in their bidding price.” The Mong Kok site will be a reference point for other commercial sites to be sold outside the Central business district in 2023/2024, such as a 115,000 sq ft commercial and hotel site in Kai Tak, said JLL’s Au. The sale will also factor into land-premium discussions between the government and developers when it comes to converting developers’ sites for commercial use, Au added. “As such, this transaction price would cause an adverse impact on government revenue,” he said. The government plans to put 18 more plots – 12 residential, three commercial and three industrial – on the market this year, contributing to a projected HK$85 billion in land premium income , according to Financial Secretary Paul Chan Mo-po.