Hong Kong developers' profit margins squeezed

Profit margins of property developers could be slashed in half this year as falling home prices and soaring construction costs and land premiums bite into performance.

With prices of new homes expected to fall 10 to 15 per cent, after last year's 2 per cent drop, analysts say margins will have to take the strain for developers building projects on land that has been bought at the market's peak since 2010.

Nicole Wong, CLSA's regional head of property research, said margins could dive to 20 per cent from the 40 per cent seen in 2009 and 2010 - the year when many developers aggressively bid up prices for prime residential sites as demand for luxury flats was fuelled by cashed-up mainlanders.

In March that year, Sun Hung Kai Properties paid HK$10.9 billion for a plot in Ho Man Tin, the second-highest price ever for a development site. It translated to a land cost of HK$12,540 per buildable square foot.

A month later, Wharf and Nan Fung Development paid HK$10.4 billion, or HK$32,014 per buildable square foot, for a site on Mount Nicholson Road on the Peak, the third-highest price ever paid for a plot.

The most expensive site on record was a plot in Siu Sai Wan, bought by Sino Land in 1997 for HK$11.82 billion, on which it built Island Resort.