China developer’s net profit at Hong Kong’s old Kai Tak airport to lose altitude amid turbulence in property market

China Overseas Land & Investment is likely to see about a 15 per cent profit margin on its latest HK$8.03 billion parcel acquisition at the city’s old airport site, far less than the windfall it made five years ago on its first purchases there, analysts say.

China Overseas was the first developer to buy land at Kai Tak, site of the city’s old airport known for nail-biting manoeuvring by pilots to avoid mountains and buildings.

That was in 2013, when the developer paid far less per square foot for two parcels than in its latest land purchase on December 27. On those early purchases, it netted an estimated 53 per cent to 79 per cent profit, according to calculations by Victor Lai Kin-fai, a managing director at Centaline Surveyors.

That higher cost will cut into its profit margin. But so will a downturn since August in the city’s property market, which has pressured developers to offer new projects at lower prices to woo nervous homebuyers. Meanwhile, once the downturn is over, which is expected in 2020, home prices are not expected to run up as quickly as in the recent property bull run.

Lung Siu-fung, a property analyst at China Merchants Securities, expects the Chinese developer’s project on the newly acquired plot will launch in 2021 at an average selling price of HK$27,000 per square foot and yield a net margin of about 15 per cent.

COLI’s latest residential site – its third pickup – is known as Area 4B Site 2, along the Kai Tak’s old runway. The developer paid HK$13,523 per square foot, or about 163 per cent higher than for its first acquisitions there in 2013, which it has turned into One Kai Tak development.

Still, the latest purchase price was 12.7 per cent lower than the HK$15,479 per square foot that

Goldin Financial Holdings paid for the adjacent parcel on November 14.

Hong Kong sells third housing plot on disused airport runway at 12.7 per cent discount, in another sign of property market woes

“COLI was lucky because it captured its first project, One Kai Tak, at the best time when it was put up for sale,” Lung said.

COLI beat 28 developers to secure the first two adjoining sites at Kai Tak for a combined HK$4.54 billion, or H$5,157 per square foot. The flats were designated exclusively for buyers with Hong Kong permanent residency, as part of the government’s efforts to make property more affordable to residents.

COLI has netted HK$12.9 billion in revenue from the sale of nearly 97 per cent of 1,179 units at phase one and two of One Kai Tak development, which was launched in August 2016. Average selling prices were HK$16,800 per square foot at phase one and HK$19,700 per square foot at phase two, according to Dataelements, a data provider that monitors the sale of new flats.

Victor Lai Kin-fai, a managing director at Centaline Surveyors, said the development cost of One Kai Tak was about HK$11,000 per square foot, leading to the estimated profit margin of between 53 per cent to 79 per cent.

China Overseas Land raises Kai Tak apartment prices by 22 per cent

Alan Jin, a property analyst at Mizuho Securities Asia, said Coli can still make a reasonable profit on its new acquisition because new flats in the Kai Tak area are selling well above $20,000 per square foot.

“It is not likely that it could reap similar level of handsome profit as it did in One Kai Tak development,” he said.

COLI declined to comment but said the total investment in the latest project would be HK$12 billion.

The Hong Kong property market entered into a correction after Chief Executive Carrie Lam Cheng Yuet-ngor introduced a vacancy tax to force developers to add to the city’s housing supply and banks began raising mortgage rates for the first time in 12 years.

Lung expects home prices to drop 15 per cent, while some analysts forecast a bigger 25 per cent fall next year.

“We expect the property market to remain sluggish amid the Chinese economic slowdown and rate hike concerns in US,” Lung said.

Home prices have dropped 6.55 per cent in the past 13 weeks, according to Centa-City Leading Index, which tracked transactions among 100 housing estates in Hong Kong.

In November, overall property transactions plunged to a 32-month low to just 3,957 deals, according to Ricacrop Properties. The decline reflected a sharp fall in new flats put up for sale as the US-China relations soured the mood of investors.

The first day sell-through rate for new residential projects was 51 per cent in October, sharply lower than the average 97 per cent recorded from January to September, data from JLL showed.

Sino Land, another developer, adopted a low-price strategy to woo nervous prospective homebuyers earlier this month. It offered the Grand Central development’s units in Kwun Tong at a 14 per cent discount to other units in the nearby area -- and it sold more than 11,000 flats.

“Sales in Kai Tak have slowed after flats at Grand Central development were put on sale at discounted prices this month,” said William Tang, a sales manager at Midland Realty’s branch in the Kai Tak area. “The launch of Grand Central has absorbed most of the potential buyers in the market.”