C-Suite Q&A: Road King diversifies to Hong Kong property
Road King Infrastructure, which listed on the Hong Kong stock exchange in 1996, had operated as a toll road builder until 2004, when it set its eye on the fast growing property development in China.
It turned to the mainland where land costs were just one-tenth of those in Hong Kong, and small players had been ousted by cash-rich local property giants.
In the first two years of entering into mainland property market, the new business started to contribute HK$506 million in sales revenue, and after its first residential project got off the ground in Guangzhou in 2004.
Last year, its property revenue surged to HK$16.84 billion (US$2.16 billion), with investments spanning across Shanghai, Beijing and Tianjin. The company also expanded into property management business. Its toll road revenue amounted to HK$1.23 billion last year.
Derek Zen Wei-peu,vice chairman of Road King Infrastructure, which employs 5,000 staff in the mainland, has seen the land price gap between the mainland and Hong Kong narrowing and decided to diversify the company’s property investment to the city last year.
It won its second major project in Hong Kong, after acquiring a residential site in Yuen Long last year. Through a a 50-50 joint venture with Ping An Real Estate Capital, a unit of China’s second largest insurer Ping An Insurance, it won the MTR Corp’s tender for a residential plot next to the Wong Chuk Hang station. Surveyors expect the project to involve a total investment of between HK$8 billion to HK$9.8 billion (US$1.26 billion), or HK$14,000 per square foot to HK$17,000 per sq ft based on a total floor area of 576,950 square feet.
Why is the firm interested to return to the Hong Kong property market?
In 2004, we started to invest in mainland property because of low land and construction costs.
We could buy a parcel of land with “tens of million” yuan, but a similar site in Hong Kong would cost at least more than HK$1 billion. For such a high entry barrier, its was beyond Road King’s financial ability, and [we could] hardly compete with property giants in government land auctions in Hong Kong until in February .
What are the changes in the Hong Kong and the mainland property market in the past decade?
Home prices and land value in the mainland have surged about 20 times in the past 10 years. A parcel of land in the mainland can easily be sold for “several billions of yuan”, which is the same as those in Hong Kong. With our financial position growing in strength , it is the time to reach for our goal – diversifying into the Hong Kong property market.
Besides land cost, what other incentives prompted Road King to return to Hong Kong?
China’s tax system is very complicated. Even when your companies performed extremely well, your profit will be capped to certain point, owing to the heavy taxation in China
For instance, a project could earn 1 billion yuan. Your profit will be cut to 400 million yuan after paying as much as 60 per cent in land appreciation tax (LAT). On top of LAT, companies are required to pay a 25 per cent corporate tax. So, we are left with 300 million yuan even if you performed excellently.
In general, profit margins in mainland property investments will not achieve more than 10 per cent.
But it is a different story in Hong Kong where corporate tax is just 16.5 per cent.
In addition, mainland property industry is a policy driven market. Beijing could impose drastic measures grounding all activities to a halt overnight when home prices rise significantly. But it also will roll out a series of stimulus measures to rescue the ailing market.
It is rare to see these drastic and heavy-handed measures being introduced in Hong Kong although the government has come out with more cooling measures to rein in the red hot market.
The above reasons also explain why mainland developers are flocking to buy Hong Kong land even at high prices. As long as they can generate more than 10 per cent profit margin, they will not mind paying high land costs.
But Hong Kong developers have a different mindset, they have alternative sources of land such as conversion of farm land or redeveloping old buildings into residential projects where land costs are lower. Hong Kong developers prefer not to join the bidding war.
What is the development plan for the MTR Corp Wong Chuk Hang station project?
We will build two towers – 33-storey and 34-storey with a total of 800 units. Units with floor areas of 500 sq ft to 900 sq ft each.
We believe that this housing project, with the location, will be sought after when we offer it for pre-sale in 2019. Construction will commence in the first quarter of 2018 as it takes six to nine months to seek approval from the Building Department. The whole project will be completed in 2020 to 2022.
The accessibility of the area has greatly increased after the opening of the Wong Chuk Hang station, which is close to Ocean Park. The area will undergo a dramatic change as lots of owners of industrial buildings are awaiting government approvals to redevelop them into offices or hotels as it also only 10 minutes to Central.
Do you think it is hard to buy land in Hong Kong?
Absolutely. We bid for the Au Tau residential site as we believed that fewer competitors were interested in it. The land cost for this site is HK$988 million, or HK$2,690 per sq ft. Taking into account the construction cost, the investment would be more than HK$3 billion. It will provide a good profit margin for us, or may be even higher than the project next to the Wong Chuk Hang Station.
Will the firm achieve a stringent cost control as Road King is also involved in construction in Hong Kong?
As we are responsible for the project design and construction, it will definitely enhance efficiency. Saving time also means we can offer the project on the market on time or even earlier. It is always a good investment if we can generate cash returns faster.
Do you own property in Hong Kong?
I don’t. I sold my home at Hong Lok Yuen in Tai Po, one of the first house developments in Hong Kong, eight years ago. Our family wanted to move to Hong Kong Island which is closer to our office. But we felt prices were too high and not worth buying as the yield is less than 2 per cent. I decided to buy Road King bonds which offer 8-9 per cent yield. My investment doubled within eight years.
Although I am renting a 2,000 plus sq ft home with monthly rent of HK$100,000, my investment is better than property. Transaction prices in Hong Lok Yuen is still about $10,000 per sq ft, not much of an increase from what I had sold for eight years ago.