Hong Kong’s top developers adopt different land bank strategies to fend of rising competition

Hong Kong’s land market hasn’t been short of record-breaking deals in the past four years, especially since mainland Chinese developers began taking an interest.

Top local developers have seen their market share decline in terms of acquisitions of government sites as bigger and richer mainland players expand onto their turf.

Sitting on piles of cash and with low gearing, Hong Kong’s big players have taken a different path when it comes to “land banks”, or acquisition of greenfield sites for new developments.

“We have seen big changes in the local property market in the past two years, like the aggressive entry and purchasing by mainland developers. Many small and medium size local developers have also come out and intensified the competition in government land sale tenders,” said Alvin Cheung Chi-wai, associate director at Prudential Brokerage.

“Big developers have to reassess their land bank strategy and make changes according to their respective strategic future directions.”

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Sun Hung Kai Properties (SHKP), the city’s largest developer by market capitalisation, has a land bank of more than 50 million square feet and will press ahead on buying new sites in a traditional manner through government tenders, according to an industry observer.

In a dramatic change in its strategy, the city’s third largest developer, Henderson Land Development, now focuses its attention on acquiring small urban redevelopment sites on which to build “matchboxes”, or tiny flats, which continue to gain favour among urbanites. While rivals that have set their sights on mega sites, Henderson Land’s land portfolio includes sites even smaller than a basketball court, or less than 1,800 square feet.

And in a strategy different from SHKP and Henderson, Cheung Kong Property Holdings (CK Property), the city’s second largest developer, has said it is considering non-property projects outside Hong Kong

“CK Property has expressed interest in non-property or quasi-property projects. The company believes investment returns for the development property business in Hong Kong, China or Singapore are not attractive enough at current land prices,” Morgan Stanley equity analyst Praveen Choudhary wrote in a research note.

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When reporting CK Property’s interim results in August chairman Li Ka-shing indicated that the company was spreading its net globally given the challenges it faces in identifying investments with reasonable returns in the current cyclical stage of the local property market.

“The group will also pursue other global investments to extend our reach to new business areas,” Li said in the interim results announcement.

CK Property’s Hong Kong residential land bank remains the smallest among the top three developers by market capitalisation, even when its latest government site acquisition is included.

On September 14 the developer won its first government public tender in four years, paying HK$1.953 billion for a luxury residential plot in Kau To Shan near Sha Tin, with a price about 33 per cent higher than the high end of market expectation.

The purchase boosted CK Property’s Hong Kong residential land bank to 7.8 million square feet, which compares to SHKP’s 50 million square feet and Henderson Land’s 24.3 million square feet.

Alfred Lau, a property analyst at Bocom, said CK Property’s discipline when it came to land banking has paid off as the company was the only developer that saw margin growth in the first half, compared to a 4 to 14 per cent margin decline at other developers.

But Choudhary of Morgan Stanley believes SHKP’s focused approach has resulted in significant market share in terms of land area and property sales.

SHKP has accumulated enough land for development for the next five years at a cost much more reasonable than today’s prices, said Choudhary. For the 2014-15 financial year, 20 per cent of sites sold through government tender went to SHKP, a similar level as the 2010-13 period, he said.

“Yet other major Hong Kong developers [CKP, Sino Land, New World Development, Kerry Properties and Wheelock Properties] only bought 18 per cent of sites through public tender during 2014-15, a significant decrease from 40 per cent from 2010-13,” he said.

Alan Jin, a property analyst at Mizuho Securities Asia, said the proportion of mainland buyers securing winning land bids has risen to 41 per cent.

China Vanke, China Overseas Land and Investment and Goldin Financial made large land acquisitions in the price range of between HK$1.3 billion and HK$6.3 billion, with an estimated flat production of more than 3,700 units, said Jin.

In contrast to CK Property’s desire to expand overseas, SHKP chairman Raymond Kwok Ping-luen was quoted as saying, “Hong Kong and the mainland will still be our focus.”

Since 2014, SHKP has spent more than HK$15 billion to acquire land that includes two residential sites and one plot designated for business use – both via government public tenders – and two large sites at Yuen Long Station and Lohas Park phase four in Tseung Kwan O – both via a tender offered by MTR Corp.

“Doing business in Hong Kong’s property market is not easy in the past 30 years but we still proceed with it. We welcome more participants [in bidding for land],” said Kwok. “With a stronger recurrent income, we will be more resilient at a time of difficulties,” he said after the firm’s full-year result announcement on September 8.

Not only is it aggressive in beefing up its land bank, SHKP also aims to achieve 3 million square feet of annual flat completions over the next three years, triple its production capacity of 1 million sq ft in 2015. The target is also the company’s largest since 1997 when it delivered 4 million to 5 million square feet a year.

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In the real estate industry, developers that hold more land stand a higher chance of gaining market turf from their weaker rivals.

With its huge sales resources, three out of every 10 new Hong Kong flats sold in the first half of the year were built by SHKP. It pulled in HK$21 billion worth of Hong Kong sales in the first half of this year, according to Morgan Stanley’s estimation, accounting for 30 per cent of the total market share, a big jump from 15 to 20 per cent a year ago.

CK Property saw its year-on-year sales plunge 77 per cent to HK$4.9 billion in the first half. Li’s property arm accounted for just 7 per cent of total Hong Kong flat sales in the first half, down from about 30 per cent in the previous year. But CK Property’s aggressive selling of its property assets on the mainland enabled it to push its full year property sales to more than HK$27 billion, compensating for the declining sales in Hong Kong. Recently, CK also put its trophy Grade A office building, The Center, in Central on the market with an asking price of HK$35 billion.

Li’s selling down of the group’s assets on the mainland has raised concerns that if the city’s richest man is retreating from the mainland, then he is also less optimistic on Hong Kong’s property market.

Not so for Lee Shau-kee’s property flagship Henderson Land. While Henderson bought only one residential site in 2015 – a plot in Tuen Mun for HK$3.628 billion – it spent HK$25.5 billion in acquiring 45 urban buildings stated for redevelopment, involving old tenements where it was able to obtain ownership ranging from 80 to 100 per cent of all the individual flats.

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These sites, which will yield a combined gross floor area of 3.9 million square feet, are spread around Mid-Levels, Western District, Wan Chai, Tai Hang, Tai Kok Tsui, Shek Kip Mei, Kowloon City, Hung Hom and Cheung Sha Wan, according to its interim result announcement in August.

The average land cost on the redevelopment sites works out at about HK$6,500 per square foot, and the new residential projects to be built are expected to be ready for sale or leasing in 2017 or beyond, said the statement.

Among the 45 plots, one site in Aberdeen has an area of just 1,740 square feet, while the largest one is a 52,000 square-foot site in Seymour Road, Mid-Levels, in which the group has a 65 per cent stake in partnership with another unnamed investor.

Henderson Land, dubbed the “small flats king”,said it would continue to replenish its land bank by acquiring old tenement buildings for redevelopment and applying for land-use conversion for its New Territories land portfolio.

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A 163-square-foot flat at its One Prestige in North Point, the tiniest flat on Hong Kong Island, sold on Tuesday for HK$3.75 million, or HK$23,000 per square foot. In Ho Man Tin, Henderson Land’s Seven Victory Avenue project, expected to be completed at the end of 2018, has flats that start at just 161 square feet.

“This dual approach applied to land bankinghas proven to be reliable source of land supply with a lower acquisition cost, which is beneficial to the group’s development returns in the long term,” the company said in a statement.

But lower land costs alone don’t help boost developers’ profit margins.

Bocom’s Lau said industry-wide ebit (earnings before interest and tax) margin in the first half of this year narrowed to 25 to 30 per cent,even when considering that projects built on lower priced land bought by developers in 2010-11 were sold at higher prices in 2014-15.

The fall in margins is mainly due to developers having to offer an array of incentives such as mortgage subsidies and rebates on top of steeper discounts to move sales, he said.

Over the past few years Hong Kong developers enjoyed profit margins of 35 per cent to 40 per cent, Lau said. “We expect further downside in Hong Kong property margins amid increasing land prices,” he said.

All six residential plots sold via government public tender since August were awarded to bids that were 17 to 70 per cent above the high-end of market expectations.

As the entry of more competitors has changed the rules of the game in Hong Kong’s property market, Cheung of Prudential Brokerage saidbig developers are baking different styles of “bread” – or flats – in view of the fact that the cost of “flour” – land – remains high.

“That’s why we see the trend of building tiny flats is developing fast as they can achieve higher selling prices per square foot to compensate for falling margins,” said Cheung.