Pavilia Farm setback to cost New World Development up to US$154.4 million in rebuilding, compensation to affected buyers
- Cost of tearing down the affected towers, rebuilding them and compensating buyers could amount to HK$1.2 billion, analysts estimate
- UOB analysts expect affected buyers to complete the transaction given the overwhelming demand and adequate compensation
Analysts from CGS-CIMB Securities and Singapore’s UOB estimated the cost of tearing down the two towers, rebuilding them and compensating the affected buyers at between HK$1 billion and HK$1.2 billion, according to reports to clients.
While CGS-CIMB anticipates the reconstruction expense at around HK$500 million, UOB expects the compensation for the 846 buyers to set back the developer by HK$600 million. Analysts from Bocom International, Goldman Sachs and Morgan Stanley forecast the hit to the company in the same range.
New World, which reported a core profit of HK$6.6 billion last year, was likely to post a core profit of HK$7.5 billion for the current financial year, according to forecasts by UOB.
On Thursday, New World sent shock waves through the industry when it announced that it would tear down and rebuild two of the seven tower blocks under construction at The Pavilia Farm project atop Tai Wai MTR station in the New Territories. The concrete walls in the podium of blocks one and eight did not meet the requirements of the approved design found during concrete strength tests, it added.
New World, controlled by one of Hong Kong’s richest families, has sold 3,028 units or 98 per cent of the entire project, and has raked in HK$36 billion in sales as of June 30, according to sales agents and analysts.
Cheng of CGS-CIMB said that The Pavilia Farm would have contributed HK$4 billion in overall profit to the developer. However, the rebuild and compensation expenses of around HK$1.1 billion will wipe out more than a quarter of that potential earnings.
The incident will also set back the delivery schedule of phase three by nine months to March 2024, New World said on Thursday. The developer has come up with two compensation options for the buyers of flats in the two affected blocks.
Lawmaker calls for probe into defective construction at Pavilia Farm
Customers who have started to pay the mortgages on their flats will receive a compensation of up to 7.6 per cent of their purchase price. This means that the buyer of a HK$15 million unit will be eligible for a HK$1.15 million payment.
Committed buyers who choose to pay their mortgages after they move in will receive HK$380,000 in interest compensation. Those who opt to cancel their purchases will each receive HK$310,000, inclusive of rental subsidy and interest compensation.
While it is too early to tell how the affected buyers will react, analysts are confident that New World will emerge relatively unscathed.
“Given the overwhelming demand for the project and the further discount that could be received from the compensation, we expect most buyers to choose to complete the transaction,” Shaun Tan and Ziv Ang Sze Champ, property analysts at UOB, said in the report on Friday. They expect the total compensation package to cost the company around HK$600 million.
New World’s shares retreated for a second straight day after the fiasco. They fell 2.7 per cent on Friday amid a declining market to HK$37.35, the lowest since February 19.
Morgan Stanley, which rated the developer “hold” on Wednesday, expects the share price to continue to fall for the next 60 days, noting that it has few saleable resources in the coming months.
