Mainland developers face hard choices as the fizz goes out of the Hong Kong property boom

Mainland Chinese developers who arrived late to the Hong Kong real estate party are among the first to suffer the hangover.

Property analysts are pointing at developers who bid lavishly two years ago and who now appear to have the least flexibility to lower prices as the property market softens.

Esther Liu, director of corporate ratings at rating agency S&P Global said mainland developers who bought land as recently as 15 months ago could face negative surprises on their profit margins if property prices continue to deflate.

“Chinese developers could find it hard to match their original return expectations and achieve lower profitability than those by local Hong Kong peers,” Liu said.

China Evergrande, the third largest mainland developers by sales, is likely to see their margins squeezed when it launches its upcoming Hong Kong residential project, the first by the developer in the city.

In January 2018 the Guangzhou-headquartered developer paid HK$6.5 billion (US$828.17 million), or HK$8,300 per square foot for a residential site at 8 Kwun Chui Road, Tuen Mun, about a 20 minute walk from the Hong Kong Gold Coast Hotel.

“The margin will be relatively slim,” Joseph Tsang, managing director and head of capital markets at JLL said. “Neighbouring projects are only selling at about HK$11,000 to HK$12,000 per square foot. So there is some risk.”

On Friday, the T Plus project in Tuen Mun, majority owned by Jiangsu-based developer Jiayuan International, halted sales with “immediate effect”. No reason was given.

The 356-unit micro-home project was able to sell only two units since its launch on December 11.

Jiayuan bought its stake in the property development from veteran investor Tang Shing-bor in May last year.

The suspension of sales at T Plus came a day after AVA 228, a 160-unit micro-home project in Cheung Sha Wan, released marketing materials for an initial batch of 50 flats. The units at AVA 228 were priced at an average of HK$19,402 per square foot, only 12.7 per cent higher than the average HK$16,937 per square foot at T Plus.

Tsang said developers with projects in districts with high supply, such as Tuen Mun, would struggle to drum up sales without offering discounts.

“Developers have to adopt a low-price strategy to [boost] sales,” he said.

Other developers who seemed to get their timing wrong include Country Garden, the mainland’s biggest developer by sales. The firm bought a 60 per cent stake in a site in Ma On Shan from Wang On Properties for HK$2.44 billion in 2017. The site was eventually developed into the Altissimo.

The project was met with a lacklustre response from homebuyers during its sales launch in late November, with only 16 flats snatched up of 110 flats offered during the first day of sales.

At L’aquatique in western Tsuen Wan, from MCC Real Estate Group, only six flats were sold in its debut the same month.

MCC is a unit of Beijing-based state-owned China Metallurgical Group Corporation.

Hong Kong home prices retreated 9 per cent from July to December, according to data released by the Rating and Valuation Department.

However, not all mainland developers have been affected.

Vanke Property (Hong Kong), a wholly owned unit of China Vanke, said it would remain largely unaffected as its lower land cost could help to offer greater flexibility in pricing.