Land flipping by property developers in Hong Kong a sign that house price growth may slow
Residential rental yields are dropping, prompting companies to seek to unload the risk of any slowdown
Property developers in Hong Kong are accelerating their disposals of land bought from the government, suggesting they are keen to contain risks at a time when home prices in the city have surged to records, according to industry experts.
In the past eight months, five developers have pocketed quick profits of more than HK$4 billion (US$511.25 million) from reselling three government sites to lower their risks should price rises begin to slow.
“Such a series of land disposals is a rare move in Hong Kong’s real estate industry. It reflects vendors’ eagerness to cash in as fast as possible on the view that the growth in home prices may slow down over the next several years,” said Alvin Cheung Chi-wai, associate director of Prudential Brokerage.
Hong Kong home prices are expected to increase by 5 to 10 per cent in 2018, according to analysts and agents, which would be slower than the 14 per cent growth in 2017.
“Buying demand from investors is weakening as soaring home prices have compressed residential rental yields to just 2 per cent. It is not a very large difference from the saving deposit rate at banks,” Cheung said.
The surge in the quick selling-on of land began in June, when state-backed China City Construction and Chun Wo Development Holdings sold a land site they had bought in a 2014 government tender. The residential site in Ma On Shan was sold to Wang On Properties for HK$2.7 billion, earning the original buyers a HK$562 million profit. The pair paid HK$2.14 billion, or HK$5,517 per square foot, for the site.
Then in September, Wang On sold a 60 per cent stake in the Ma On Shan site to Guangzhou-based developer Country Garden Holdings for HK$2.44 billion. In the three months it took to acquire the site and then resell the majority stake, Wang On pocketed a profit of HK$800 million. The price of the land had jumped 90 per cent to HK$10,500 per square foot since China City Construction and Chun Wo originally won the site.
In January, Henderson Land sold a residential site in Tuen Mun that it had acquired in a government tender in 2015, reaping a profit of more than HK$2.8 billion on the sale to China Evergrande Group.
Earlier this month, HNA made a HK$1.7 billion profit by selling two of its four residential plots in Kai Tak for nearly HK$15.95 billion to Henderson Land Development. HNA bought the sites at government auction 15 months ago. However, Prudential’s Cheung noted that HNA’s sale was prompted more by its need to reduce debt.
Lawrence Poon Wing-cheung, senior lecturer at City University of Hong Kong’s department of building science and technology, said vendors have passed the market risk on to the buyers, as these government sites were subject to restrictions on development.
For instance, the site in Ma On Shan must be fully developed by March 31, 2021, while the Tuen Mun lot requires the developer to complete the project by March 31, 2022. Meanwhile, the deadline for the development of the two sites at Kai Tak is December 31, 2021 and March 31, 2022.
“The new buyers of these sites have shorter periods to finish their developments which means less flexibility in their pricing should the market encounter a sharp downturn,” he said.
Nicole Wong, regional head of property research at CLSA, said Henderson Land’s move was an example of savvy asset recycling.
“Henderson generated nearly HK$8 billion profit from reselling the site in Tuen Mun and an office building in North Point. By reinvesting its disposal gain, it just spent HK$8 billion from its own pocket to buy the two sites in Kai Tak which have greater potential in terms of price growth in future,” she said.
Other analysts noted that the risk of slower growth in Hong Kong’s property prices was not an issue for many mainland Chinese companies buying land in the city, as their main aim was to gain a foothold in a market less regulated than their domestic one, even if it cost them more.
“They prefer to purchase land in the private market at a big premium as it will guarantee they have the land they want,” said Vincent Cheung, a deputy managing director of Asia valuations and advisory services at Colliers International.
“Otherwise they would be locked into a fierce competition if they participated in government tenders,” he said. He noted that relative to their revenues in the mainland, the costs of buying in Hong Kong were small.
Tony Wan, general manager for sales and marketing for Hong Kong properties at K Wah International Holdings, also noted that high land prices bore no relation to the future movement of flat prices, which depended on supply and demand and market sentiment.
“Developers will price their flats in accordance with market conditions when the flats are due for presale release several years from now,” he said.
But he also forecast the pace of growth of home prices would slow this year, to about 5 per cent.