Chinese developers aggressively bidding for government land in Hong Kong

A joint venture led by state-owned China City Construction recently entered Hong Kong’s property market, paying a record high price for a residential site in Ma On Shan.

The crown for highest price lasted all of five months .

Another mainland Chinese company, CITIC Group, came along and grabbed a nearby site in the same area for HK$1.469 billion, or HK$6,500 per sq ft, breaking the record HK$5,517 per sq ft set earlier by China City Construction.

The pair are part of 10 mainland developers who setting new benchmarks in land prices in Tuen Mun, Kai Tak and Tsuen Wan as they entered Hong Kong’s land market at a breakneck pace since 2013.

They have spent HK$14 billion in gobbling up government sites in Hong Kong for the first nine months this year, exceeding the HK$11 billion value for the whole of 2014 and HK$ 8 billion in 2013, according to data from the Lands Department compiled by the South China Morning Post.

The entry of mainland giants are set to change the balance of power in the Hong Kong land market as they account for a quarter of the HK$134 billion in government land sales revenue.

Whether the entry of cash-rich Chinese developers marks the end of a Hong Kong property market dominated by a few local giants remains to be seen, but a new era is definitely here. Mainland developers are dramatically changing Hong Kong’s property landscape, providing more choices in the city’s housing market.

The top five local developers -Cheung Kong Property, Sun Hung Kai Properties, New World Development, Sino Land and Henderson Land Development – are seeing their share of the government land sale market and property sales diminishing.

“The top five developers market share, as reflected in the scale of land acquisitions, have been reduced from 89 per cent in 2011 to 41 per cent in the year to September,” property analyst Eva Lee wrote in a report.

Aside from losing market share to mainland developers, she said the joint shares of Nan Fung Development and Wheelock have expanded from 2 per cent to 14 per cent over the past four years.

In terms of property sales volume, the combined market share of the top five developers dropped to 58 per cent for the nine months this year, from more than 70 per cent in each of the past four years, data by Centaline Property Agency showed.

“It is the first time in almost a decade for them to fall below 70 per cent due to the entry of more small to medium sized new players ,” said Wong Leung-sing, an associate director of research at Centaline Property Agency.

He believes the property sales market would be more diversified about five years from now when more projects due to be launched by mainland developers.

By that time, more new brands such as Vanke Property (Hong Kong), a unit of the mainland’s largest listed developer China Vanke, Poly Property Group and Shanghai-based Shimao Property Holdings will be ready to grab potential buyers shopping for their dream home.

Yu Kam-hung, senior managing director for investment properties at CBRE Hong Kong, believes more competitors bidding for land should be a positive sign.

“The more flat producers will increase market competition in turn helps to cool down home prices,” he said.

Slowing economic growth and the likelihood of an imminent interest rate rise by the US Federal Reserve in December has added further downward pressure in a city ranked by CBRE as the world’s most expensive location to buy a home.

Alfred Lau, a property analyst at Bocom International, believes Hong Kong’s big developers have slowed down land acquisitions to reflect their cautious market outlook. The lone exception would be Sun Hung Kai Properties.

He noted that the share of Hong Kong’s major developers “will not continue falling”. He added: “Although Cheung Kong focuses in selling properties, it still secured a big site in Lohas Park last month,” he said.

Mainland developers actively participated in acquiring land in Hong Kong in 2013 when Vanke Property (Hong Kong) teamed up with New World Development to win a residential site in Tsuen Wan for HK$3.4 billion. Its venture into Hong Kong was followed by Poly Hong Kong Property, CITIC group, China Metallurgical, Shimao Property and Sino-Ocean Land. Their appetite was for land designated for residential use. This could range from mass to luxury homes, and also hotel development.

However, Chinese developers aggressive bidding- described as reckless by some analysts – have started to raise concerns if they are unwittingly putting themselves at unnecessary risks between Hong Kong’s high land costs and the souring sentiment of the local housing market.

The unusually high prices they are paying have also raised worries that land costs in Hong Kong might spike further, with more developers running after a limited number of sites offered for sale every year.

Denis Ma, head of research of JLL Hong Kong, said increased competition at government land sales should naturally lead to stronger land prices.

“And this is what appears to be playing out in the land sales market. The high prices being achieved at government land sales over the past year has coincided with the increased participation of mainland developers with some winning bids setting new pricing benchmarks in certain areas,’ he said.

Land prices in Kai Tak, where three out of four sites were bought by mainland firms, shot up 27 per cent, and there has been a 25 per cent increase in Tuen Mun within months.

With a development cycle of three to four years, mainland developers’ projects will likely be caught in a market correction as analysts widely expect home prices to fall 10 to 30 per cent from now to 2017.

Despite fierce competition and soaring land costs which could slice development profit margins in half to 15 per cent per cent over the next several years, Hong Kong is still a favourite investment destinations among mainland firms.

Nichole Wong, regional head of property research at CLSA, believes mainland players should cover their development cost unless Hong Kong home prices drop sharply and fast, such as losing 20 per cent in a short period.

“This time, the price correction will come slowly,” she said, “The balance sheet of mainland firms will be unscratched even if they got burnt in Hong Kong where they only have one or two projects.” CLSA predicts Hong Kong home prices will likely fall 17 per cent from now to 2017.

In Hong Kong, Wong said developers could use the land as collateral to seek 50 per cent of the land value from banks to fund its property project.

For a project requiring a total development cost of HK$10 billion, she said developers may just require initial capital of HK$5 billion, compared with nearly the full amount in the mainland even at the initial stage of the project.

“With a budget of HK$100 billion, they can develop 20 projects in Hong Kong at the same time, but only 10 in the mainland,” she said.

Shanghai-based Shimao Property Holdings has distanced itself from the aggressive bidding by other mainland developers, saying “they bought (the) site in Kowloon Tong at a good price.”

The developer, the biggest spender among Chinese mainland companies for land in Hong Kong, has forked out nearly HK$8 billion in the last 12 months to secure a 50 per cent stake in a hotel site in Tung Chung and a 100 per cent owned luxury residential site in Kowloon Tong.

The two projects will require about HK$20 billion in total investment cost.

Shimao Property believes Hong Kong home prices would not likely see a significant fall.

“We are not worried about the Hong Kong market outlook at all. By the time our Kowloon Tong project is launched in 2018 or 2019, home prices may rebound again,” said the spokesman.

He said it is diversifying into Hong Kong because the business environment is tougher at home.

“The 10- year golden era in the mainland real estate industry has gone. We will definitely continue buying land in Hong Kong,” he said.